Bloomberg News

PMI Group Credit-Default Swaps Climb to Highest in 16 Months

June 23, 2011

June 23 (Bloomberg) -- The cost to protect against a default by PMI Group Inc., the third-largest guarantor of U.S. home loans, jumped to a 16-month high.

Five-year credit-default swaps on Walnut Creek, California- based PMI rose 2 percentage points to 37 percent upfront as of 4:38 p.m. in New York, according to broker Phoenix Partners Group. That means it would cost $3.7 million initially and $500,000 annually to protect $10 million of the insurer’s obligations from default for five years.

Standard & Poor’s last week lowered the counterparty credit and senior debt ratings on PMI to CCC- from CCC+ and said it may cut the rankings further, citing “expectations of continued elevated losses in 2011 and 2012” relative to its capital.

“Losses in line with or in excess of the current industry trends -- without additional capital contributions or substantial internal capital generating initiatives -- could put significant pressure on PMI’s statutory capital by year-end 2012,” S&P analysts led by Miles Kaschalk in New York wrote in a June 14 report.

Five-year credit-default swaps on the MBIA Inc. unit that guaranteed mortgage debt also climbed. Contracts on MBIA Insurance Corp. added 0.75 percentage point to 34.75 percent upfront, Phoenix data show.

MGIC Investment Corp. and Radian Group Inc. are the two largest U.S. mortgage insurers.

The cost to protect U.S. corporate bonds from default rose for a second day after the Federal Reserve cut its forecasts for growth in the world’s largest economy and European Central Bank President Jean-Claude Trichet warned that risk signals for financial stability in the euro region are flashing “red.”

Index Rises

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 1 basis point to a mid- price of 98.5 basis points as of 4:49 p.m. in New York, according to index administrator Markit Group Ltd. It’s risen from 89.5 at the end of last month.

“People are waking up to the fact that there’s risk out there,” said Bonnie Baha, head of the global developed credit group at DoubleLine Capital LP, which has $12 billion in assets under management.

The index, which typically rises as investor confidence deteriorates and falls as it improves, pared an increase of as much as 3 basis points after Greek Prime Minister George Papandreou assured European Union leaders that he would deliver the budget cuts they are demanding in exchange for the next installment of emergency loans and a new rescue package, according to a Greek government official.

--Editors: Richard Bedard, Pierre Paulden

To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net; Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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