MUNI WATCH: How To Pick Up 130 BPs Off Gulf Oil Spill

By Stan Rosenberg Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--The explosion and sinking of the Deepwater Horizon oil rig in the Gulf of Mexico has been a disaster for the region's environment and the rig's operator, BP PLC (BP, BP.LN). But J.P. Morgan municipal bond analysts note that it is also an opportunity for investors. They recommend playing the spread between BP's corporate debt and the almost $5 billion of municipal debt backed by the oil giant. Investors who sell the corporate debt short and buy the municipal obligations--industrial development revenue bonds, which are backed by corporate lease payments or corporate credit--can bump up the return on their investments by as much as 130 basis points, or 1.3 percentage points. "This profit varies, depending on the investor's marginal tax rate," the analysts wrote in commentary over the weekend, "but remains positive for all investors in all brackets higher than 15%." The firm's economists estimate that the impact of the oil spill on the broad U.S. economy will be "negligible," despite its effects on offshore drilling, fishing and tourism, and the recovery costs, and the analysts don't see an "immediate threat" to states' general-obligation bond ratings. The largest and most liquid series of the munis are five fixed-rate issues sold in 1990 to refund marine-terminal revenue bonds of the Texas City Industrial Development Corp. These bonds are guaranteed by Atlantic Richfield, which merged with BP Amoco in 2000. While not historically traded much, activity has returned to the bonds in recent weeks at levels roughly 130 basis points higher than the after-tax yield on BP's corporate debt, the J.P. Morgan analysts said. "We recommend buying these 10-year Texas City bonds, while shorting 10-year BP corporates, to enjoy the 130 BPs spread," they wrote in weekly commentary. About one-third of BP's municipal debt is backed by the London-based parent company, BP PLC, and the remainder is backed by U.S. subsidiaries like BP America Inc., Atlantic Richfield and BP Amoco PLC (U.S.). "This distinction could be important down the road in the event that the company decides to utilize a bankruptcy strategy to deal with the costs of litigation," the analyst wrote. "However, despite recent reports in the press, we think the risk of a near-term adversarial bankruptcy is low." If the parent were to file under a Chapter 15 cross-border bankruptcy, the court must be located in the country where the company is headquartered, such as London, they continued. If a U.S. subsidiary were to file, there is no certainty that the corporate veil couldn't be pierced, and claims could be made on the parent. "If anything, a potential filing would more likely be a prepackaged petition in the future after the costs of the spill have become larger and more certain," they said. The analysts are Alexander Roever, Chris Holmes and Josh Rudolph. (Stan Rosenberg, a veteran observer of the municipal bond industry, writes about issues and trends in the muni market for Dow Jones Newswires. He can be reached at 212-416-2226; stan.rosenberg@dowjones.com ) (TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at TalkbackAmericas@dowjones.com. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.) (END) Dow Jones Newswires June 21, 2010 16:52 ET (20:52 GMT)