Bloomberg News

Corporate Credit Swaps in U.S. Fall to Two-Month Low on Stimulus

December 12, 2012

A gauge of U.S. corporate credit risk dropped for a third day, reaching the lowest level in almost two months after the Federal Reserve boosted stimulus and as budget talks continued in Washington.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, fell 0.4 basis point to a mid-price of 93.3 basis points at 4:31 p.m. in New York, according to prices compiled by Bloomberg. The measure earlier fell to 91.4, the lowest intraday level since Oct. 19, and was poised for the lowest close since Oct. 18.

The Fed said it will buy $45 billion a month of Treasury securities starting in January, expanding its asset-purchase program, and it linked the outlook for its main interest rate to unemployment and inflation targets. Further stimulus measures may ease investor concern that an economic slowdown will hinder companies’ ability to repay debt.

“People have been wanting the Fed to insert more hardline targets, so that probably is good news for some, that they are tying it more to the economy,” Noel Hebert, who oversees about $250 million as chief investment officer at Bethlehem, Pennsylvania-based Concannon Wealth Management LLC, said in a telephone interview.

Fed Purchases

Chairman Ben S. Bernanke is using his unlimited authority to buy Treasuries in an unprecedented effort to stoke growth. The Fed said interest rates will stay low “at least as long” as the unemployment rate remains above 6.5 percent and if inflation “between one and two years ahead” is projected to be no more than 2.5 percent.

The credit-default swaps gauge pared its drop as Bernanke said the Fed can’t offset the full effect of the fiscal cliff. President Barack Obama reduced his demand for tax increases as he and House Speaker John Boehner inched toward a budget deal to prevent more than $600 billion of automatic tax increases and spending cuts from taking effect next year. Boehner told reporters that the sides have “serious differences” on the plan.

The credit-swaps index typically falls as investor confidence improves and rises 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.

The risk premium on the Markit CDX North American High Yield Index rose 1.4 basis points to 469.3 basis points, Bloomberg data show.

Chesapeake Swaps

Access Midstream Partners LP (ACMP:US), the natural gas company acquiring assets from Chesapeake Energy Corp. (CHK:US), is planning to sell $1.4 billion of bonds to help fund the purchase. The Oklahoma City-based company is offering notes due in 2023, it said today in a statement. Moody’s Investors Service will grade the new bonds Ba3, the ratings company said today in a statement.

Chesapeake, which in May said it was facing a cash crunch in 2013, has since been plugging a $22 billion shortfall with asset sales.

Credit swaps protecting against losses on the debt of Chesapeake dropped 8.7 basis points to 472.5 basis points as of 3:28 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. That’s the lowest level since April 5.

Swaps on Bausch & Lomb Inc. plunged 72.5 basis points to 75 basis points as of 3:30 p.m. in New York, according to CMA.

Warburg Pincus LLC, which bought the eye-care company for $3.7 billion in September 2007, hired Goldman Sachs Group Inc. to explore the sale of firm, said to two people with knowledge of the matter.

To contact the reporter on this story: Julia Leite in New York at jleite3@bloomberg.net

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


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Companies Mentioned

  • ACMP
    (Access Midstream Partners LP)
    • $53.51 USD
    • 2.73
    • 5.1%
  • CHK
    (Chesapeake Energy Corp)
    • $18.68 USD
    • 1.23
    • 6.58%
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