Bloomberg News

BofA, Citigroup Credit Swaps Jump After Moody’s Cuts Debt Grades

September 21, 2011

Sept. 21 (Bloomberg) --The cost to protect debt from Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. rose after Moody’s Investors Service cut credit ratings at the banks today, saying U.S. support is less likely in an emergency.

Credit-default swaps tied to Bank of America added about 40 basis points from yesterday to 375 basis points as of 3:41 p.m. in New York, according to broker Phoenix Partners Group. The swaps were at 340 prior to the announcement. Swaps on Wells Fargo jumped to the highest since July 2009, climbing 17 basis points to 143 basis points, Phoenix prices show. Contracts on Citigroup rose 19 to 250, according to data provider CMA.

Moody’s cut long-term senior debt grades at Bank of America and Wells Fargo and Citigroup’s short-term credit rating, saying government support has returned to pre-crisis levels. Bank of America, Citigroup and Wells Fargo have combined total long-term debt of $925 billion and $177 billion of short-term borrowings as of June 30, according to the companies’ most recent regulatory filings. That means most investors own their debt, said Rajeev Sharma of First Investors Management Co.

“They’re such a big part of the index, when events like this happen, everyone feels the pinch,” said New York-based Sharma, who helps oversee $1.5 billion in investment-grade debt. “These are definitely the names that if you’re playing the financial space, you’re going to be exposed to them. You have to be.”

Economy Threat

A benchmark gauge of U.S. corporate credit risk also increased, showing investors’ concerns that a weaker financial system would hurt the broader economy. Federal Reserve policy makers said today they will replace much of the short-term debt in their portfolio with longer-term Treasuries in an effort to reduce borrowing costs and stave off a recession. and here’s fresh CDX

Series 17 of the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, climbed 3 basis points to 136.5 basis points, Phoenix prices show. The new series, which began trading yesterday, was trading 7.5 basis points wider than Series 16 of the index.

Charlotte, North Carolina-based Bank of America has the heaviest long-term debt load of the three banks with $427 billion of borrowings, according to the company’s most recent quarterly filing.

Failure Risks

The government is “more likely now than during the financial crisis to allow a large bank to fail should it become financially troubled, as the risks of contagion become less acute,” Moody’s wrote in statements today on Bank of America and Wells Fargo. While Citigroup may lose backing as well, its stand-alone credit has shown improvement, Moody’s said, confirming the New York-based bank’s long-term rating of A3 and cutting its short-term credit rating to Prime 2 from Prime 1.

Bank of America, the biggest U.S. lender by assets, had its ratings cut two levels to Baa1 from A2 for long-term senior debt, and to Prime-2 from Prime-1 for short-term debt, Moody’s said in a statement. The outlook on long-term senior ratings remains negative, indicating another cut may be ahead.

San Francisco-based Wells Fargo’s senior debt was downgraded one level to A2 from A1, according to a separate statement. The outlook remains negative on the senior long-term ratings.

Downgrade Costs

Rating-firm downgrades could weaken liquidity, limit access to credit markets and pressure businesses that rely on trading revenue, Bank of America said in an Aug. 4 regulatory filing. A downgrade of the bank by one level at all rating firms could cost the company $1.5 billion in collateral-posting and termination payments tied to derivatives and trading agreements as of June 30, the bank said.

Bank of America’s $2 billion of 5 percent notes due in May 2021 tumbled 1.44 cents on the dollar to 93.31 cents with a yield of 5.92 percent at 3:20 p.m., according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Relative yields on the debt rose to 405 basis points after being issued at a 185 basis-point spread in May, the data show.

That compares with spreads on overall dollar-denominated bank debt of 322 basis points, Bank of America Merrill Lynch index data show. Bank of America is trading wider than most BBB rated companies, which pay spreads of 283 basis points on average, the data show.

“The magnitude of the Bank of America downgrade two notches may have taken some of us by surprise, but as far as where spreads have been trading on these names, they’re way in line, or worse than a Baa1,” Sharma said.

Contracts on Morgan Stanley rose 28 basis points to 346. Goldman Sachs Group Inc. swaps increased 19 to 254, Citigroup Inc. climbed 19 to 250 and JPMorgan Chase & Co. rose 9 to 141, CMA data show.

--With assistance from Hugh Son and Donal Griffin in New York and Dakin Campbell in San Francisco. Editors: Pierre Paulden, John Parry

To contact the reporters on this story: Sapna Maheshwari in New York at; Shannon D. Harrington in New York at

To contact the editor responsible for this story: Alan Goldstein at

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