Moody's downgrades BP three notches

BP's credit rating was cut three notches Friday morning as the oil giant faces billions in costs from the oil spill in the Gulf of Mexico. 

Moody's Investors Services said today that the oil spill will have "a sustained negative impact on the group’s free cash flow generation and overall financial profile for a number of years. This assessment reflects a substantial upward revision of the estimated size of the leak, the continued failure to bring the leaking Macondo well under control, and the mounting costs and claims for damages. Moody’s believes that costs for containment, clean-up, litigation and fines are likely to be higher than the rating agency had previously expected in view of the widespread and continuing physical and economic damage."

Moody's called the creation of a $20 billion escrow fund a "mildly positive development," and characterized the staggered schedule of contributions over the next three and a half years as "manageable from a liquidity perspective, considering the strong cash flow generated from its global operations and the various measures BP has announced to conserve cash."

"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 in a release. 

Cost-cutting measures include the suspension of dividends, announced Wednesday by BP Chairman of the Board Carl-Henric Svanberg at the White House, as well as significant cuts in capital spending and an increase in planned divestments of $10 billion during the next year. 

Still, the agreement over the escrow fund doesn't include a ceiling or a floor, and Moody's said "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."

The markets seemed unflustered by the change, as BP has seen its credit rating downgraded already several times this month. 

On June 3, Moody's cut BP's rating from Aa2 to Aa1 and Fitch Ratings cut BP's credit rating six notches on Tuesday. Standard & Poor's downgraded BP by two notches on Thursday, the second time this month it has lowered the company's rating.