UPDATE: Moody's Downgrades BP Credit; Cites Rising Spill Costs

(Adds comments, background.) By Jeffrey Sparshott Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Ratings agency Moody's Investors Service Friday downgraded BP PLC's (BP) credit rating three notches as costs and exposure to litigation from the Gulf of Mexico oil spill continue to mount. It is the third big whack at BP's credit rating in recent days. "Moody's updated assessment is that the spill will have a sustained negative impact on the group's free cash flow generation and overall financial profile for a number of years," the ratings agency said. Ratings agencies, which evaluate creditworthiness, have slashed BP's rating as the financial and political toll of the Deepwater Horizon accident mount. Moody's lowered BP's senior unsecured ratings to A2 from Aa2, after a June 3 downgrade to Aa2 from Aa1. Standard & Poor's Ratings Services Thursday lowered its rating on BP by two notches to A/A-1, its second downgrade on the oil giant this month, while Fitch Ratings downgraded BP long-term debt six notches to just above junk level Tuesday. An April 20 explosion aboard the Deepwater Horizon drilling rig killed 11 workers and triggered the leak. Now an estimated 35,000 to 60,000 barrels of oil a day is spilling into the Gulf of Mexico, fouling waters and coastlines across four states. BP said about 14,750 barrels of oil were collected and 3,850 barrels of oil flared Wednesday. The company hopes to increase the capture capacity to 28,000 barrels a day by early next week, 53,000 barrels by the end of June and, if needed, 60,000 to 80,000 barrels by the end of July. Company executives this week struck a deal with the White House to set aside a $20 billion fund to pay off claims related to the disaster. BP Chief Financial Officer Byron Grote Wednesday said he hoped the White House deal would reinforce what had been AA ratings from Moody's and S&P. "We remain ... in dialogue with both Moody's and Standard and Poor's making certain that they are well aware of the cash flows and the balance sheet elements of the firm, and it's obviously up to them to decide whether or not the strength of the BP Group remains AA," he said during a call with analysts. Moody's said establishing the fund--which will be accumulated over 3 1/2 years--was a small positive but noted it didn't cap the company's liability. "Establishing a clear funding mechanism to make payments to injured parties may moderate pressure for the government to pursue more punitive actions," Moody's said. But the "uncertainty over the ultimate cost for massive litigation claims and other contingent liabilities will be an overhang on BP's creditworthiness that will persist for years to come." BP declined to comment on the downgrade. BP ratings remain on review for possible further downgrade, Moody's said. "The oil leak has to stop. As long as the oil leak continues, the costs continue to mount (and) the exposure to litigation continues," then ratings will remain under review, said David Staples, managing director of Moody's corporate finance group. Markets appeared to take the downgrade in stride. At 1234 GMT BP's shares were up 7 pence, or 1.9%, at 366 pence, outperforming London's blue-chip FTSE 100 index. And five-year credit default swaps moved to around 460 basis points from 475 basis points earlier in the day. -By Jeffrey Sparshott, Dow Jones Newswires; +44 (0)207 842 9347; jeffrey.sparshott@dowjones.com (Mark Brown contributed to this article.) (END) Dow Jones Newswires June 18, 2010 09:25 ET (13:25 GMT)