The credit market is pricing in a 36% chance BP will default within five years as the oil giant deals with the fallout from the Gulf of Mexico disaster.
The default risk implied by credit default swaps is up from 7% one month ago, according to CMA DataVision prices. BP swaps climbed 70.5 basis points to 576.5 yesterday, Bloomberg reports.
BP debt due next year traded at distressed levels yesterday, with investors demanding as much as 1,251 basis points yield over Treasuries.
The oil giant yesterday announced it would place $20bn into a fund over several years to compensate residents along the Gulf of Mexico. It has also suspended dividends until 2011.
Its default probability, which is based off a standard pricing model published last year by the International Swaps and Derivatives Association, assumes investors would recover 40% of face value should BP to fail to meet its obligations.
BP bonds have lost 14.6% this month, after declining 2.62% in May, according to Bank of America Merrill Lynch index data.
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