Bloomberg News

Company Default Risk Tumbles to Lowest in Five Months in Europe

January 26, 2012

Jan. 26 (Bloomberg) -- The cost of insuring against default on European corporate debt fell to the lowest in five months after the Federal Reserve signaled plans to keep borrowing costs low through 2014.

The Markit iTraxx Crossover Index of credit-default swaps on 50 mostly junk-rated European companies dropped 29 basis points to 607, the lowest since Aug. 17, according to JPMorgan Chase & Co. prices at 12 p.m. in London. A decline signals an improvement in perceptions of credit quality.

Fed Chairman Ben S. Bernanke said yesterday he sees “exceptionally low” interest rates till late 2014, after previously pledging to maintain lower borrowing costs till mid- 2013. Bernanke also said the central bank is considering more asset purchases to boost economic growth.

“Sub-investment grade credit is very sensitive to the cost and availability of refinancing, so the news from the Fed is a positive,” said Roger Francis, an analyst at Mizuho Securities Ltd. in London.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings dropped 5.75 basis points to 144.5, while the Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers declined 12 basis points to 215, the lowest since Oct. 28. A gauge of subordinated bank bond risk was 26 basis points lower at a five-month low of 369.

Italy, Spain

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments fell seven basis points to 321, the lowest since Dec. 5.

Contracts on Italy fell 30 basis points to a three-month low of 409, while Spain dropped 12 basis points to 356, according to CMA prices. Ireland declined 15 basis points to 619, the lowest since May, and Belgium fell 17 basis points to 246 basis points.

A basis point on a credit-default swap protecting 10 million euros ($13 million) of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

--Editors: Andrew Reierson, Michael Shanahan

To contact the reporter on this story: Namitha Jagadeesh in London at njagadeesh@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net


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