UPDATE 3-Fitch downgrades BP by six notches, bonds plummet

By Alex Chambers

LONDON, June 15 (Reuters) - BP Plc saw its credit rating lowered by six notches by Fitch Ratings as the agency questioned the firm's access to capital markets, hammering its bonds and potentially boosting funding costs.

Fitch cut BP from its coveted AA-level and left it hovering at BBB -- two notches above a 'junk' rating.

'The principal changes (include) the indication late last week from U.S. government scientists of a significantly higher spill rate than previously announced,' Fitch said.

'The significant step-up in action from the U.S. government surrounding calls for pre-emptive escrowing of damage claims,' was another important reason for the downgrade.

It was the first multi-notch downgrade of BP by any of the three major rating agencies and the first that left it below AA -- a level that finance director Byron Grote said a fortnight ago the company wanted to keep.

BP's U.S. bonds dropped, with 5.25 percent notes due in 2013 falling 6.3 cents to 90 cents on the dollar, yielding 748 basis points over U.S. Treasuries, according to MarketAxess data -- more than the average junk bond.

Its 4.25 percent 750 million euro bond -- which matures January 2011 -- was 113.8 bps wider, bid at 470.2 bps and offered at 325.6 bps, according to Tradeweb.

And BP's five year credit default swap (CDS) -- a financial instrument used to insure debt against default -- widened 75 basis points to 495 bps, implying a junk rating.

If such pricing levels persist, borrowing money and refinancing debt will become pricier for BP.

BP's free cash flow before dividends for 2010 is $6 billion, Fitch said, adding it would be surprised if the company did not suspend quarterly cash dividend payments until the cost implications of the oil spill were clearer.

It has $5 billion of cash, $5.25 billion of undrawn bank lines and $5.25 billion of standby lines, Fitch said.

Fitch had on April 10 estimated containment and cleanup costs of the spill could top $3 billion, but mistakenly said the impact on BP would be limited by insurance.

Fitch sliced the rating from AA+ by a notch on June 3, matching similar moves by Moody's and Standard and Poor's who currently rate the company Aa2 and AA- respectively.

(Additional reporting by Dena Aubin in New York; Editing by Douwe Miedema and David Holmes) Keywords: OIL SPILL/DOWNGRADE ([e-mail]; [phone]; Reuters Messaging: [e-mail]) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.