Bloomberg News

U.S. Credit Swaps Rise; Softbank Said to Plan $2 Billion in Debt

April 17, 2013

A gauge of U.S. corporate credit risk rose as a business survey from the Federal Reserve showed “moderate” growth in the economy and as analysts forecast a decline in corporate earnings.

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, added 2.3 basis points to a mid-price of 84.2 basis points at 4:29 p.m. in New York, according to prices compiled by Bloomberg.

Earnings at companies in the Standard & Poor’s 500 Index (SPX) dropped 1.4 percent in the first three months of the year, according to analyst estimates compiled by Bloomberg. Of the 60 firms that posted results, 70 percent have beaten estimates for profit this season and 52 percent have exceeded forecasts for sales, according to data compiled by Bloomberg.

“With some of the data that’s come out, people see that it’s not going to be a quick, strong recovery,” Mirko Mikelic, a money manager at Fifth Third Asset Management in Grand Rapids, Michigan, said today in a telephone interview. “No one expects earnings to be great, just OK. Things are just going to take some time.”

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.

Measured Growth

The Fed said the measured growth in the U.S. was led by the manufacturing, housing and automobile industries, according to its Beige Book report, a survey that analyzes economic conditions in 12 U.S. districts.

Consumer spending grew modestly, while employment conditions were unchanged or “improved somewhat,” the Fed’s business survey said. Officials are debating when to curtail their unprecedented bond buying based on the outlook for the labor market.

“Housing has been doing better and corporate balance sheets are pretty well positioned,” Paul Scanlon, co-head of the fixed-income team at Putnam Investments LLC in Boston, said in a telephone interview. “But you’ve had a little disappointment in employment lately. There’s been a little bit of a slowdown in some of the data.”

Softbank Corp. (9984), the Japanese telecommunications company vying with Dish Network Corp. (DISH:US) to acquire Sprint Nextel Corp. (S:US), is preparing to sell $2 billion of bonds.

Acquisition Financing

The company may sell seven-year notes denominated in dollars and euros this week, according to a person familiar with the transaction who asked not to be identified because terms aren’t set. The bonds may yield 4.5 percent to 4.75 percent, and the sale is not contingent on the deal’s closing. Softbank began marketing the debt last week with part of the proceeds intended to be used for the Sprint transaction, the person said.

The risk premium on the Markit CDX North American High Yield Index climbed 9.3 basis points to 408 basis points, Bloomberg prices show.

There were eight defaults among U.S. companies, affecting $8 billion of debt in the first three months of 2013, compared with 15, comprising $7 billion of debt, a year earlier, according to a report today from Moody’s Investors Service. The media and energy industries accounted for most of the defaults in this year’s first quarter.

“Solid demand from fixed-income investors for bonds and leveraged loans, along with low interest rates, have contributed to the low default count,” Moody’s analysts led by Lenny Ajzenman said in the report. “Companies have taken advantage of accessible bond and loan markets to refinance pending maturities.”

The average relative yield on speculative-grade, or junk- rated, debt widened 6.6 basis points to 540.4 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s and less than BBB- at S&P.

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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