Bloomberg News

Company Bond Risk Falls as French Banks Reject Funding Concerns

September 13, 2011

Sept. 13 (Bloomberg) -- Benchmark gauges of corporate credit risk in the U.S. and Europe fell from the highest levels in more than two years as France’s biggest banks said they had ample access to cash to counter a reduction in financing from U.S. money-market funds as Europe’s debt crisis intensified.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on the debt of U.S. and Canadian companies, decreased 4.4 basis points to a mid-price of 131.5 basis points as of 4:47 p.m. in New York, according to Markit Group Ltd. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 9.2 basis points to 190.1. Swaps on an index tied to European banks and insurance companies fell from a record.

The risk measures eased as Societe Generale SA’s Chief Executive Officer, Frederic Oudea, said France’s second-biggest bank by market value has “plenty of buffers of liquidity” and can do without access to U.S. money-market funds. BNP Paribas SA, France’s largest bank, said in an e-mailed statement that it can finance its dollar needs at normal levels, denying a claim in a Wall Street Journal opinion piece today that an unnamed BNP official said the lender could no longer borrow in dollars.

“For our bank, the exposure to sovereign debt is low, absolutely manageable,” Oudea said in an interview with Bloomberg Television in New York. “We have plenty of buffers of liquidity and we are adjusting to the reduction in the money- market fund exposure.”

Swaps on Paris-based Societe Generale eased from a record high, falling 4.5 basis point to 430.4 basis points, according to data provider CMA in London. Contracts on BNP fell 5.4 basis points to 299.3, CMA data show.

Senior Debt

The Markit iTraxx Financial Index, linked to the senior debt of 25 banks and insurers in Europe including Societe Generale and BNP, dropped 15 basis points from a record closing price to 299, according to prices from JPMorgan Chase & Co. An index linked to subordinated debt fell 14 to 536.

The swaps indexes typically fall as investor confidence improves and rise as it deteriorates. The contracts 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.

Pacific Investment Management Co.’s Mohamed A. El-Erian said organizations such as the International Monetary Fund need to act with European banks at risk of being engulfed in the region’s sovereign-debt crisis.

“We’re getting close to a full-blown banking crisis in Europe,” El-Erian, Pimco’s chief executive officer and co-chief investment officer, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.

Short-Term Bets

Investors should avoid short-term bets on the direction of credit markets, because the outlook surrounding the region’s sovereign debt problems remains hard to predict, Bank of America Corp. credit strategists led by Anurag Bhardwaj and Hans Mikkelsen wrote in a note to clients yesterday.

“While spreads are wide and price in very adverse scenarios in many market segments, uncertainty is still too high for a short-term outright trade in either direction,” the strategists wrote.

--With assistance from Erik Schatzker, Tom Keene, Ken Prewitt, John Detrixhe and Deirdre Bolton in New York and Abigail Moses in London. Editors: Pierre Paulden, Mitchell Martin

To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net

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


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