Bloomberg News

U.S. Company Risk Index Falls for Second Day From Two-Year High

September 14, 2011

Sept. 14 (Bloomberg) -- A gauge of U.S. corporate credit risk declined for a second day from a two-year high as German and French leaders expressed support for Greece to remain in the euro monetary union.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 2.2 basis points to a mid- price of 129.1 basis points as of 5:15 p.m. in New York, according to index administrator Markit Group Ltd.

The credit swaps index, which typically falls as investor confidence improves and rises as it deteriorates, declined as French President Nicolas Sarkozy and German Chancellor Angela Merkel said they’re convinced Greece will remain in the euro area, according to a statement issued by Sarkozy after they spoke to Greek Prime Minister George Papandreou by telephone.

“Any iota of positive news, or at least positively perceived news, results in a rally,” Adrian Miller, a New York- based fixed-income strategist at Miller Tabak Roberts Securities LLC said in an e-mail.

The credit swaps index rose to 135.9 basis points, its highest level since July 2009, on Sept. 12 as investor concern mounted that Greece would default.

Credit-default swaps on Dynegy Inc., the power producer that warned earlier this year it may seek bankruptcy protection, dropped 2.3 percentage points to 34.4 percent upfront as of 5 p.m. in New York, according to data provider CMA.

UBS Request

The contracts decreased after Zurich-based UBS AG asked a derivatives industry group to determine whether there has been a so-called succession event at Dynegy. That would include a company dividing into two, in which the debt can remain whole with one entity or be split between each.

That may cause credit-swap contracts to fall if the debt is tied to an entity with a better credit profile than its parent.

UBS made the request to the International Swaps and Derivatives Association, according to a letter on the New York- based group’s website.

The third-largest independent U.S. power producer has posted five straight quarterly losses driven by lower power prices and reduced cash flow. It transferred $1.25 billion of assets, mainly coal-fired power facilities, out of a unit that issued bonds for the company earlier this month, after saying July 10 it would retool its structure to create two units, one owning eight natural gas-fired power generation facilities and another owning a group of six coal-fired facilities.

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.

--Editors: Pierre Paulden, 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: Alan Goldstein at agoldstein5@bloomberg.net


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