* Fitch cuts BP rating to AA from AA+, outlook negative
* Fitch said in April that financial impact of spill limited
* Sees legal, clean-up risks; threat of increased spill flow
* Moody's cuts to Aa2 from Aa1,review for possible downgrade
* BP shares rise ahead of Friday call with analysts
(Adds Moody's, updates CDS, shares)
By Sarah Young and Paul Hoskins
LONDON, June 3 Fitch Ratings downgraded BP
(BP.L), reversing its view that the Gulf of Mexico oil spill
would have a limited financial impact on the company, and was
joined by Moody's as fears grow over clean-up and legal costs.
"The downgrade of BP's ratings reflects Fitch's opinion that
risks to both BP's business and financial profile continue to
increase following the Deepwater Horizon accident," Fitch said
on Thursday. [ID:nWLA5540]
The BP oil spill, which began in April, is causing an
ecological and economic catastrophe along the U.S. Gulf coast.
Estimates for the total cost to BP range from $5.3 billion from
Dutch bank ING to $37 billion from Credit Suisse.
Fitch in May admitted to a mistake when it assumed that the
impact of the spill on BP's finances would be mitigated by
insurance. However, Fitch said at the time the impact of the
spill on BP's credit rating remained limited.
BP insures its own operations in the United States, rather
than using commercial insurers, which means it is responsible
for funding the clean-up [ID:nN30179546] [ID:nLDE6441W9]
But on Thursday the agency downgraded its rating on BP debt
to AA from AA+ and attached a negative outlook, citing
substantial additional risks including clean-up and legal costs.
Other factors that could lead to further downgrades include
the oil well flow rate permanently increasing, the relief well
being drilled by BP failing to completely arrest the oil flow
and clean-up costs exceeding Fitch's worst-case scenario of
around $5 billion in any one year, the agency added.
Moody's also on Thursday cut the group's ratings by one
notch to Aa2 from Aa1, also citing the clean-up and legal costs,
and placed the group on review for further possible downgrades.
"Moody's expects these costs to weigh significantly on BP's
free cash flow generating capacity and to constrain its ability
to focus on other key areas of the company's business in the
near to intermediate term," it said.
Reuters reported on Tuesday that a $23 billion slide in BP's
market value and a surge in the cost of protecting its debt were
due to fears oil could continue spewing into the sea for another
two months at least and that BP's latest bid to stem the flow
could make matters worse. [ID:nLDE650082]
Five-year credit default swaps on BP were about 30 basis
points tighter on Thursday at around 230 basis points, according
to data from Markit.
On Wednesday, the cost of insuring BP's debt via CDS had
soared, with BP's five-year CDS widening at one stage by 100
basis points to a record 270 basis points.
The other main rating agency, Standard & Poor's, which on
May 7 revised its outlook for BP to negative from stable, has
said it is reviewing ratings on around 35 companies as a result
of a temporary ban on deepwater drilling in the Gulf of Mexico.
SHARES EDGE HIGHER
Shares in BP gained as much as 4.7 percent on Thursday as a
call with analysts planned for Friday gave hope there would be
an update on the company's plans for its dividend which is seen
to be threatened by the growing cost of the spill.
Two U.S. Senators said on Wednesday BP should cut its
dividend until the full costs for the clean-up can be
The stock was up 2.6 percent at 440.8 pence by 1336 GMT,
back in line with European peers .SXEP, and outperforming a
1.8 percent higher UK market .FTSE. [ID:nN03207991]
"Maybe some people have decided that on a risk reward basis
the value's there," said UBS analyst Jon Rigby, who added that
most people's estimates of the cost of the spill is now "hugely"
over-discounted in the stock.
(Additional reporting by Jane Merriman and Victoria Bryan;
Editing by Erica Billingham)