Bloomberg News

U.S. Company Credit Swaps Fall to One-Week Low on ECB Bond Plan

September 05, 2012

A gauge of U.S. corporate credit risk fell to the lowest level in more than a week as details of the European Central Bank’s bond-buying proposal emerged.

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, declined 0.6 basis point to a mid-price of 100.5 basis points, according to prices compiled by Bloomberg.

The swaps index fell as European Central Bank President Mario Draghi proposed a bond-buying program involving unlimited purchases of government debt that will be sterilized to assuage concerns about printing money, two central bank officials briefed on the plan said. The ECB holds its policy meeting tomorrow amid investor concern that further economic weakness will pressure companies’ ability to repay debt obligations.

The swaps measure, which typically declines as investor confidence improves and rises as it deteriorates, reached a more than 15-week low of 98.5 on Aug. 20. 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.

Moody’s Investors Service’s speculative-grade liquidity- stress index, which climbs when corporations’ ability to manage cash needs deteriorates, increased to 3.5 percent in August from a record low of 3.1 percent in July, the New York-based ratings company said today.

Credit swaps tied to Office Depot Inc. dropped after Kevin Peters, the retailer’s president for North America, said back- to-school sales met expectations and the company affirmed its 2012 outlook for adjusted earnings of as much as $135 million at Goldman Sachs Group Inc.’s retailing conference in New York.

Contracts on the Boca Raton, Florida-based company eased 2.3 percentage points to 15.5 percent upfront as of 4:30 p.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

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


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