BP PLC, battling to plug a gushing oil well under the Gulf of Mexico, is seeking loans of $1 billion from each of seven banks to raise up to $7 billion, banking sources told Thomson Reuters LPC on Friday.
BP is raising capital for a $20 billion clean-up fund, said a different senior banker in the United States, referring to the escrow account that U.S. President Barack Obama demanded the company set up to handle damage claims.
BP has asked its main lenders to put a series of coordinated 1-year standby bilateral loans in place, one source said. This type of loan is made by individual banks to a company and are not syndicated.
Banks including Barclays, HSBC and Royal Bank of Scotland are working on loans of $1 billion each for BP, several banking sources said.
"BP is quietly approaching banks for the facility and it's a club deal," a second banker said. A third banker said that no U.S. banks were providing loans.
Such a loan by BP move would echo a similar move by Exxon Corp in 1996. Following the Exxon Valdez oil spill in Alaska in 1989, Exxon put $6.75 billion of 1-year standby loans in place to guarantee payment of a $5 billion fine against the company.
An official for BP declined to comment on any plans for loans.
"We do not comment on rumour and speculation," a BP spokesperson said.
BP's five-year CDS hit a record wide of 610 basis points (bps) on Wednesday after a six-notch downgrade to BBB on Tuesday by Fitch, bankers said.
The private loans would bypass the wide spreads that would be demanded by the corporate bond market, which would price off the CDS and current inflated bond spreads.
BP's five-year CDS recovered to 465 bps on Friday. Its illiquid one-year CDS is priced at around 620 bps, but traded as wide as 1000 bps earlier this month, according to Markit.
Bilateral loans would be priced far lower than BP's CDS rates on the expectation that banks will earn hefty fees from BP at a later date, the senior banker said.
"All of the scenarios for BP would net huge fees. Even if the company is broken up, it has enormous assets that would result in huge sellside M&A fees," he added.
Large U.S. bond managers said that they had not been approached or declined to comment.
BP said in an investor call on June 4 that it had $5 billion of cash in addition to $5.25 billion of undrawn committed bank lines, and $5.25 billion of committed stand-by bank lines.
The group's free cash flow before dividends for 2010 is $6 billion, according to Fitch, which does not include the potential to monetise existing assets.