Credit default swaps are used by a company like BP (NYSE:BP) to protect against the possibility of defaulting on bonds, and the costs to protect that debt has risen again, this time by 61 basis points, to 539.3 basis points for the oil giant.
Much of this is based upon the potential disruption of their Gulf oil spill cleanup efforts, now that the hurricane and storm season is upon us.
As early as next week the first Atlantic storm may enter the Gulf, with the worst storm season in history possibly happening this year, with up to three major storms projected to impact the Gulf, and consequently, the oil cleanup.
A buyer of bonds is paid the face value by the credit swaps if a borrower doesn't meet their obligations.
The basis point refers to what a company pays to protect $10 million in debt on an annual basis, with one basis point equaling $1,000. So the higher the basis points the higher the cost of protecting the debt.
Since April 20, the cost of protecting debt has risen 12 times what it was at the time, another element added to the costs associated with BP doing business.
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