Bill Ackman Bought BP CDS In May (280bps), Short BP Debt

Hat tip to Bloomberg via DealBreaker who posted Pershing Square's Q2 Investor Letter. According to Ackman's letter, Pershing averaged into BP CDS at 280 basis points per annum, or bought credit insurance on BP's bonds. He's betting that BP's credit risk is mispriced due to U.S. operation risk, balance sheet impairment risk ("clean-up costs, penalties and legal liabilities") and statistically speaking, the CDS is mispricing the probability that "the current liability estimates that have been publicly promulgated materially underestimate the ultimate costs to BP".

Back in June I reported that BP CDS spiked to 382 bps (+128% in 7 days) and BP bond yields hit 7.82% (chart) when oil was flowing like mad and killing birds. Ackman's letter stated that BP CDS peaked at 600bps. So if another event threatens BP's financial condition, even if nothing happens to the company, BP credit traders could buy BP protection again and run the CDS up to 600bps (test the top). The value of Ackman's CDS holding would rise 114%.

So if the crediteers are worried about BP's credit quality going forward that must mean the stock has event risk as well, no? Bond holders dictate a company's fate if it files for bankruptcy, not the equity. I wonder if value investor Whitney Tilson is still holding his BP stock from early June after his massive gains. Or if he bought puts or plans to average down if the stock plummets again.

I couldn't find a BP 5Y CDS chart anywhere on the web, you'll have to buy a Bloomberg Terminal or CMA Datavision subscription. The 1-year chart alone is probably worth more than my life itself. However, offers daily quotes on the most liquid CDS, check it out here. BP CDS is currently priced at 7 "upfront+100bps" so 107bps plus an upfront charge, if I'm reading that correctly. This information is important to know if you own the stock, it's like an actively traded credit rating. Here's a snapshot of the CDS quote and a BP stock chart with trend resistance and 50 day moving average support.

Snapshot of BP 5Y CDS at, Price = 7 ("upfront+100bp")

BP (British Petroleum) - courtesy of

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