A gauge of U.S. company credit risk fell as the partial shutdown of the government entered its fourth day. The cost to protect the debt of Forest Oil Corp. (FST:US) decreased.
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, decreased 1.1 basis points to 79.7 basis points at 11:34 a.m. in New York, according to prices compiled by Bloomberg.
Investor optimism that lawmakers will reach a deal over the federal budget and debt ceiling limit may alleviate concern that a prolonged shutdown and U.S. default may harm economic growth, according to Hans Mikkelsen, a credit strategist at Bank of America Merrill Lynch in New York.
“The two issues are merging, so you’re more likely to get a compromise that will address both the budget and the debt ceiling,” Mikkelsen said in a telephone interview. “In that sense, you can understand why the markets have not really been affected by this shutdown.”
The index typically falls as investor confidence improves and climbs as it deteriorates. 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.
Credit risk for Denver-based Forest Oil dropped to the lowest point in more than two years after the company agreed to sell oil and natural gas assets in the Texas Panhandle to Templar Energy LLC for $1 billion. That’s more than the $762.5 million total market value of Forest Oil at yesterday’s close.
Five-year swaps tied to the debt of Forest Oil tightened 31 basis points to 441 basis points as of 11:07 a.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market. The swaps closed at 425 basis points on Aug. 3, 2011.
Standard & Poor’s global corporate default tally increased to 61 companies this week after OGX Petroleo & Gas Participacoes SA defaulted on its debt and GateHouse Media Inc. filed for Chapter 11 bankruptcy, according to a report dated yesterday by the ratings company. Of the 61 companies, 36 are based in the U.S., S&P said in the report.
The potential default of Energy Future Holdings Corp., in addition to OGX, may boost the trailing 12-month, high-yield default rate to about 3.5 percent, according to an Oct. 2 report from Fitch Ratings.
The Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds, fell 6 basis points to 384.7 basis points, Bloomberg prices show.
The average extra yield investors demand to hold dollar-denominated, investment-grade corporate bonds rather than similar-maturity Treasuries tightened 0.5 basis point to 131.4 basis points, Bloomberg data show. The measure for speculative-grade, or junk-rated, debt rose 6.6 basis points to 675.4.
Investment-grade debt is rated Baa3 or higher at Moody’s Investors Service and at least BBB- by S&P.
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