Bloomberg News

U.S. Company Credit Risk Falls as Leaders Meet on Europe Bailout

November 30, 2011

Nov. 29 (Bloomberg) -- A benchmark gauge of U.S. credit risk declined for a second day on optimism that European leaders may expand bailout measures to curb the region’s debt crisis.

The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 1.6 basis points to a mid-price of 139.6 basis points at 2:19 p.m. in New York, according to Markit Group Ltd. Contracts on Transocean Ltd. fell the most in more than a year after the driller said it will sell shares to repurchase convertible debt.

Investors pushed the gauge lower as finance ministers hold initial discussions today on channeling European Central Bank loans to cash-strapped euro nations through the International Monetary Fund. Speculation about a new stability package that would curb Europe’s market upheaval is boosting confidence both sides of the Atlantic, according to Adrian Miller, fixed-income strategist at Miller Tabak Roberts Securities LLC in New York.

“Risk aversion has waned,” he wrote in an e-mail. “Execution risk remains very high, but that hasn’t dampened the improvement in swap spreads,”

The index, which typically falls as investor confidence improves and rises as it deteriorates, has declined from 150.1 basis points on Oct. 3 as investors have wagered that Europe’s leaders will prevent the region’s fiscal crisis from infecting bank balance sheets worldwide.

In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings declined 3.2 to 196.3 basis points.

Transocean Contracts

Credit-default swaps tied to Transocean’s debt dropped after the world’s largest offshore oil driller said it will offer 26 million shares to finance a $1.7 billion repurchase of convertible notes, the Vernier, Switzerland-based company said in a statement today.

The contracts declined 47.2 basis points to 327 basis points as of 1 p.m. in New York, 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 the biggest one-day decline since September 2010, after last year its Deepwater Horizon rig burned and sank during last year’s Macondo disaster in the Gulf of Mexico.

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.

Contracts on American Airlines parent AMR Corp. that pay out after a default or bankruptcy were quoted today at a mid- price of 83 percent upfront as of 12:02 p.m. in New York, according to broker Phoenix Partners Group, versus 70 percent upfront yesterday. That means it would cost $8.3 million to protect $10 million of the company’s debt. The swaps pay the buyer of the contracts face value, minus the recovery value of the bonds that are set by dealers and investors in an auction of the securities.

American filed for bankruptcy after failing to secure cost- cutting labor agreements and sitting out a round of mergers that dropped it from the world’s largest airline to No. 3 in the U.S.

--With assistance from Shannon D. Harrington in New York. Editors: John Parry, Alan Goldstein

To contact the reporter on this story: Mary Childs in New York at

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

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