Oct. 24 (Bloomberg) -- The cost to protect the debt of MGIC Investment Corp. and Radian Group Inc. from default jumped after regulators seized a unit of mortgage insurer PMI Group Inc.
Credit-default swaps on MGIC, the largest U.S. insurer of home loans, increased 4.4 percentage points to 35.2 percent upfront as of 5 p.m. in New York, according to data provider CMA. That’s in addition to 5 percent a year, meaning it would cost $3.52 million initially and $500,000 annually to protect $10 million of Milwaukee-based MGIC’s debt for five years. Earlier the contracts climbed to a record 40 percent upfront.
Contracts on Radian, the second-largest U.S. mortgage guarantor, climbed 2.6 percentage points to 41.3 percent upfront, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
Investor confidence in the creditworthiness of the two companies dropped after PMI, the third-largest mortgage insurer, hired Evercore Partners Inc. to explore a possible restructuring. PMI also retained the law firms Sullivan & Cromwell LLP and Young Conaway Stargatt & Taylor LLP, according to a regulatory filing today from the Walnut Creek, California- based insurer, which has posted 16 straight quarterly losses.
The unit was taken over by the Arizona insurance watchdog and told to pay out claims at 50 cents on the dollar after losses on mortgage defaults drained capital. The insurer was already prohibited from selling new coverage.
Credit-default swaps, which typically fall as investor confidence improves and rise as it deteriorates, 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.
A benchmark gauge of U.S. corporate credit risk declined to its lowest level in more than a month as U.S. stocks rallied, Caterpillar Inc.’s earnings beat estimates and as Europe made progress toward taming its debt crisis.
The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declined 5.4 basis points to 125.9 basis points at 4:53 p.m. in New York, according to index administrator Markit Group Ltd. That’s the lowest level since Sept. 16.
The Standard & Poor’s 500 Index climbed 1.3 percent to 1,254.19. Earnings-per-share have topped analysts’ average estimates at 73 percent of the 113 companies in the S&P 500 index that reported earnings since Oct. 11, Bloomberg data show. Caterpillar, the world’s largest maker of construction and mining equipment, posted third-quarter net income that topped analysts’ estimates amid growing demand for shovels and drills used to dig up metals.
European finance leaders in debt-crisis talks outlined plans to aid banks and ruled out tapping the European Central Bank’s balance sheet to boost the region’s rescue fund. Europe’s 13th crisis-management summit in 21 months also explored how to strengthen the International Monetary Fund’s role. The complete blueprint won’t come together until a summit in two days.
“The credit market remains stoic,” Anke Richter, a strategist at Mizuho International in London, wrote in a note. Business will “remain subdued” before the Oct. 26 summit.
The credit swaps index, which typically falls as investor confidence improves and rises as it deteriorates, has declined from 150.1, the highest level in more than two years on Oct. 3, as investors have bet that European leaders will prevent the region’s fiscal crisis from infecting bank balance sheets.
--With assistance from Shannon D. Harrington in New York. Editors: Mitchell Martin, John Parry
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