Bloomberg News

Credit Swaps in U.S. Hold Near 2-Year Low; Discovery Sells Bonds

March 12, 2013

A gauge of U.S. corporate credit risk held at about the lowest level in two years as investors awaited the release of reports that may signal whether the economic recovery is taking hold.

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, rose 0.2 basis point to a mid-price of 79.7 basis points, according to prices compiled by Bloomberg. The measure fell to 79.5 basis points yesterday, its lowest closing level since Feb. 17, 2011.

U.S. retail sales probably rose in February for the fourth month amid an improved job market and stronger household finances, according to the median forecast in a Bloomberg survey of 82 economists before figures from the Commerce Department tomorrow. Signs the economy is strengthening may boost investor confidence in companies’ ability to repay debt.

“Investors are pretty upbeat about the trend in the U.S. economy, even if they’re not euphoric about the numbers,” Marc Pinto, head of corporate bond strategy at New York-based Susquehanna International Group LLP, said today in a telephone interview.

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

Discovery Sale

Discovery Communications Inc. (DISCA:US), owner of cable networks TLC and Animal Planet, issued $1.2 billion of bonds in its first sale in 10 months to help fund its purchase of 12 Scandinavian television networks.

The company sold $350 million of 3.25 percent, 10-year debt to yield 125 basis points more than similar-maturity Treasuries and $850 million of 4.875 percent, 30-year bonds at a relative yield of 165 basis points, according to data compiled by Bloomberg.

The risk premium on the Markit CDX North American High Yield Index rose 0.8 basis point to 399.4 basis points, halting three days of declines, Bloomberg prices show.

The cost to protect Advanced Micro Devices Inc. (AMD:US)’s debt from default dropped to the lowest level since Oct. 18 after the second-largest maker of processors for personal computers said it will sell and lease back its property in Austin, Texas. The sale is expected to generate about $164 million in cash net of fees, according to a company statement.

Covenant Quality

Five-year credit-default swaps on the company’s debt dropped 9 basis points to 843.5 basis points as of 3:37 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. The contracts have dropped 94 basis points the past three trading sessions.

Covenant quality for high-yield debt deteriorated in February, reaching the lowest level in at least two years, a report from Moody’s Investors Service showed today.

Moody’s covenant-quality index dropped to 3.96 last month, continuing an erosion in quality for North American high-yield bonds that began in July, according to Alexander Dill, lead covenant analyst. The scale, which fell to the lowest since Moody’s began tracking the data in January 2011, spans from 1 to 5, with one representing a strong covenant.

The average relative yield on speculative-grade, or junk- rated, debt slid 1 basis point to 489.4 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s and less than BBB- at Standard & Poor’s.

To contact the reporter on this story: Victoria Stilwell in New York at vstilwell1@bloomberg.net

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


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Companies Mentioned

  • DISCA
    (Discovery Communications Inc)
    • $83.71 USD
    • -0.52
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  • AMD
    (Advanced Micro Devices Inc)
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