Bloomberg News

Credit-Default Swaps in U.S. Increase on Spanish Debt Concerns

May 25, 2012

A gauge of U.S. corporate credit risk increased as rating company Standard & Poor’s slashed the credit grade of five Spanish banks.

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, rose 0.2 basis point to a mid-price of 117.4 basis points at 4:36 p.m. in New York, according to prices compiled by Bloomberg.

The swaps gauge widened as the Bankia group, the Spanish lender nationalized earlier this month, said it needs 19 billion euros ($23.8 billion) of government money to restructure its business. S&P cut the credit ratings on five Spanish banks, citing the country’s weakening economy.

The moves followed the downgrade by Moody’s Investors Service of 16 Spanish banks on May 17, citing concerns about souring loans, the recession, restricted access to funding and the reduced ability of the government to back up lenders as its own creditworthiness suffers.

The swaps gauge typically rises as investor confidence deteriorates and falls as it improves. 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.

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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