BP oil spill: Tony Hayward warns top BP investors it's 'likely' to suspend dividend

The embattled chief executive briefed investors yesterday afternoon on plans that would halt dividend payments at BP for the first time in 18 years. Other BP board members were despatched to meet top institutions to “ask for their opinion and blessing” on the plans they claim are an unavoidable political cost of the oil spill in the Gulf of Mexico.

Meanwhile, in other developments:

• Carl-Henric Svanberg, chairman of BP, met George Osborne, the Chancellor, at Downing Street.

• Nancy Pelosi, US House of Representatives speaker, added to calls for BP to suspend dividend payments.

• Florida demanded $2.5bn (£1.7bn) in escrow to cover potential losses as heavier oil washed ashore.

BP’s directors are still insisting that the company has enough cash to continue paying the dividend but explained to investors that suspending the payment is the only move that could ease the damaging political attacks. Insiders said that the majority of shareholders were supportive of the move, although they told Mr Hayward they wanted “some quid pro quo” from the US government that the “excessive” anti-BP rhetoric would stop.

One source close to the talks said: “Investors are very keen that they don’t give up the dividend for nothing. They will give Obama his political victory but only in return for assurances from the US. Investors also made it clear to BP that the company must stand up and fight.”

Under plans being discussed by BP, the dividend could be paid into an escrow account that could then be distributed to investors after the clean-up and compensation costs have been settled. The company is determined to avoid setting up a general compensation fund because of fears the US demands will be limitless.

Investors told BP they would rather see the dividend suspended for a short time and then re-established in full rather than cut and then remain at a lower level. They also sought assurances from BP that the suspension would last a maximum of two quarters.

BP has not yet made a decision on its dividend policy but is expected to finalise its policy at a board meeting early next week. The decision is expected to coincide with the launch of a more intense diplomatic strategy backed by the Government.

BP’s share price has almost halved since the disaster on April 20, wiping nearly £50bn off the company’s market value. Yesterday, the stock rallied 7pc to 391.9p on the view that markets had over-reacted.

The company is also facing a crisis in the credit markets, as the cost of insuring its debt in the wake of the spill has spiralled to new highs, with bond markets indicating for the first time that bankruptcy is a real possibility. Credit default swaps on BP debt closed last week at more than 470 basis points, meaning that to insure £1,000 of the company’s bonds against default now costs £47, which compares with less than £5 on the day the Deepwater Horizon oil rig exploded, triggering the leak.

Banks with credit lines to BP, along with counter-parties of the oil company’s trading arm, have all been large buyers of credit protection in recent days.

The frantic buying, which has seen trading in BP bonds and CDS rise from negligible amounts to between £500m and £1bn a day in the past week, has caused the company’s one-year yield curve to invert, meaning that its short-term cost of borrowing is now higher than its long-term rate.

Yield curve inversions are one of the most obvious market signals that a borrower is expected to default, or even go bankrupt.

The yield curves of US investment banks Bear Stearns and Lehman Brothers both inverted in the weeks and days leading up to their collapse, though few think it is likely that BP is facing an imminent default situation.

Simon Ballard, a senior credit strategist at RBC Capital Markets, said: “Clearly, the market is going to take some convincing that the company can survive in one piece.”

Hedge funds have become big traders in BP debt, which from being among the most predictable investments in the market has turned into one of the most volatile.

“It’s the biggest game in town; funds see this as the new Greece,” said Anthony Peters, a strategist at SwissInvest in London. “The wide bid/offer spread, the volatility and the large volumes make this the perfect trade for hedge funds and an ideal opportunity for them to make back money.”

In an analyst and investor conference call last week, Mr Hayward and Mr Svanberg tried to calm market fears surrounding BP and the potential financial impact of the spill, which is expected to leave the company with a bill that could easily exceed $10bn.

Despite these assurances, BP shares and debt have fallen in value this week. The shares are down 10pc over the week, while the cost of insuring BP’s debt more than doubled over the same period. A spokesman for BP said the company’s financial position remained strong.

Michael Bloomberg, mayor of New York city, was a rare American voice to speak out in defence of the company and of Mr Hayward. The billionaire businessman said that Mr Hayward “didn’t exactly go down there and blow up the well”.