Bloomberg News

U.S. Corporate Credit Swaps Climb by Most in Three Weeks

May 03, 2012

A benchmark gauge of corporate credit risk rose by the most in almost three weeks after data showed service industries in the U.S. expanded less than forecast as the economic recovery struggles to gather pace.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, added 2.1 basis points to a mid-price of 95.9 basis points at 4:39 p.m. in New York, according to prices compiled by Bloomberg. That’s the biggest jump since the measure recorded an increase of 4.8 basis points on April 13.

The gauge climbed as the Institute for Supply Management’s non-manufacturing index fell to a four-month low of 53.5 in April from 56 in March, the Tempe, Arizona-based group’s data showed today. Earlier, the European Central Bank kept its benchmark rate at a record-low 1 percent as Mario Draghi, the bank’s president, said the economic outlook remains uncertain.

“The service numbers were a disappointment, and Draghi’s comments continue to keep Europe’s economic health top of mind,” Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. in New York said. “That’s a cocktail which pushes risk measurements higher.”

The median forecast of 74 economists surveyed by Bloomberg News called for a decrease to 55.3 in the non-manufacturing gauge. Readings above 50 signal expansion.

GM Swaps Drop

Credit-default swaps on General Motors Co. (GM:US) dropped by as much as 21 basis points to a mid-price of 308.5 basis points as the company reported earnings that beat analyst estimates. The contracts tied to the world’s largest automaker climbed later in the day to be unchanged at 329.5 basis points, according to CMA, which is owned by CME Group Inc.

GM, which is rated one level below investment-grade by Standard & Poor’s and Moody’s Investors Service, may be in line for a step up after Ford Motor Co. was raised to high grade by Fitch Ratings on April 24. The automaker reported first-quarter profit, excluding some items, of 93 cents a share, which beat the 85-cent average estimate of 16 analysts surveyed by Bloomberg.

“You are going to see many more rising stars in the automotive industry,” Eric Selle, a JPMorgan Chase & Co. credit analyst, said in a telephone interview before the earnings report. “There are pluses and minuses on GM and Ford, but when you look at it, both have investment-grade credit profiles.”

Default swaps on GM have fallen from a high of 490 basis points at the start of the year, while swaps on Ford have declined by 136.4 basis points as of 5:01 p.m., CMA prices show.

Chesapeake Bonds Gain

Chesapeake Energy Corp (CHK:US)’s $1.3 billion 6.775 percent notes due in March 2019 rose by 0.375 cent on the dollar to 96.125 cents to yield 7.50 percent, after falling yesterday to the lowest level since they were issued in February.

JPMorgan raised its recommendation on the debt of the oil and gas driller to “buy” from “hold,” “based on cheap valuation,” because the company can overcome liquidity concerns, analysts at the bank led by Gregg Brody wrote in a note on May 2.

Credit-default swaps on the company dropped 1.7 percentage points to 7.2 percent upfront as of about 4:15 p.m., CMA prices show. That means it would cost $720,000 initially and $500,000 a year to protect $10 million of Chesapeake’s debt for five years.

The 12-month-trailing speculative-grade corporate default rate in the U.S. rose to 2.6 percent in April from 2.5 percent in March, S&P said in a research note today.

Credit-default swaps typically fall as investor confidence improves and rise as it deteriorates. The contracts 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.

To contact the reporter on this story: Sridhar Natarajan in New York at snatarajan15@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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Companies Mentioned

  • GM
    (General Motors Co)
    • $32.49 USD
    • 0.55
    • 1.69%
  • CHK
    (Chesapeake Energy Corp)
    • $22.43 USD
    • -0.56
    • -2.5%
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