Bloomberg News

U.S. Company Credit Risk Falls on Speculation About Fed Stimulus

August 30, 2011

Aug. 30 (Bloomberg) -- A benchmark gauge of U.S. corporate credit risk fell today, contributing toward the biggest two-day drop in more than eight months on speculation the Federal Reserve will enact more stimulus to safeguard the recovery.

The index dropped by the most in two days since December 2010 after the Fed said in minutes of its meeting released today that some policy makers, who weren’t identified, “felt that recent economic developments justified a more substantial move” beyond the pledge adopted at the Aug. 9 gathering of the Federal Open Market Committee to hold its key interest rate at a record low until mid-2013.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 2.2 basis points to a mid-price of 118.1 basis points as of 4:33 p.m. in New York, according to index administrator Markit Group Ltd.

The index soared to 126.8 basis points on Aug. 22 from 96.3 at the end of July, signaling deterioration in company creditworthiness, as concern mounted that unemployment holding above 9 percent would derail the economic recovery.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Credit-default swaps on Rochester, New York-based Eastman Kodak Co. dropped 3.2 percentage points to 34.2 percent upfront, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. That’s in addition to 5 percent a year, meaning it would cost $3.42 million initially and $500,000 annually to protect $10 million of Kodak’s debt.

The 131-year old camera company, seeking to generate cash from its intellectual property, has signed confidentiality agreements with numerous potential buyers of patents it put up for sale last month, Chief Executive Officer Antonio Perez said.

--Editor: John Parry

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Pierre Paulden at ppaulden@bloomberg.net


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