Building Pressure (BP)?

Could BP go bankrupt?

A lot of people are asking that question. The company has already spent $3.5 billion on the cleanup and has pledge to spend at least $20 billion on reparations. But since civil fines could total tens of billions, and punitive measures are often three times this, could a court decision force BP into bankruptcy? After all, the company has a net worth of only $100 billion. Legal judgments are senior to ordinary debt, so bankruptcy seems possible.

Only, in the US we have a portion of the bankruptcy code known as Chapter 15. Chapter 15 recognizes that if a foreign company files for bankruptcy, it is allowed to file in the country of its incorporation. In BP’s case, that would be England. Presumably, an English court would be more sympathetic to BP than would a court in, say, Louisiana. Forcing the parent company into bankruptcy would force it “over there.”

Sure, their American subsidiaries would be eligible for filing in the US. But BP America only has half of BP’s net worth and about a quarter of its income. A bankruptcy filing here would remove BP’s other assets and earning power from consideration. By “haircutting” claimants, the company would permanently alienate millions of potential customers.

It seems that bankruptcy is a remote possibility for BP. US claimants don’t want to force them into an English court, and their US assets aren’t nearly enough to pay everyone affected. Bankruptcy would be truly a black spot.

Douglas R. Tengdin, CFA
Chief Investment Officer
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