Bloomberg News

U.S. Bank Swaps Jump Most in a Month as Russia Moves on Ukraine

March 03, 2014

The cost to protect against losses on the bonds of the biggest U.S. banks climbed the most in a month after Russia seized control of Ukraine’s Black Sea region of Crimea.

The average price on credit-default swaps of the six largest banks rose 2.1 basis points to 74.1 basis points as of 11:28 a.m. in New York, according to prices compiled by Bloomberg. That’s the biggest increase since Feb. 3.

Investors sought protection as Ukraine mobilized its army and called for foreign observers after Russian President Vladimir Putin got approval to use military force in Ukraine last week. Groups of as many as 100 Russian soldiers attacked Ukrainian army units in Crimea, where ethnic Russians comprise the majority, during the past 24 hours, the border guard service said.

“Financial institutions are usually regarded as being the most interconnected to global markets,” Scott MacDonald, head of research at Stamford, Connecticut-based MC Asset Management Holdings LLC, said in a telephone interview. “What happened over the course of the weekend and last week has obviously filtered huge into the market.”

‘Russian Aggressions’

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark used to hedge against losses or to speculate on creditworthiness, increased 1.4 basis points to 64.9 basis points as of 11:34 a.m. in New York, according to prices compiled by Bloomberg. The measure rose from 63.5 basis points on Feb. 28, the lowest closing level since Jan. 6.

The swaps gauge 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.

“Credit investors are not very worried at all about the situation,” Brian Reynolds, chief market strategist for brokerage firm Rosenblatt Securities Inc. in New York, said in a telephone interview about the small widening of credit derivatives. “They believe that this is not going to lead to a shooting war, that it will turn out like all the other Russian aggressions in recent years.”

Daimler Offering

Daimler Finance North America LLC, a unit of Daimler AG (DAI), plans to issue benchmark three-year fixed- and floating-rate debt, or pieces of both, and seven-year notes as soon as today, according to a person with knowledge of the transaction. The unit of the world’s biggest commercial-vehicle manufacturer last issued dollar-denominated debt in July.

The securities may be rated A3 by Moody’s Investors Service, said the person, who asked not to be identified citing lack of authorization to speak publicly. Benchmark sales are typically at least $500 million.

A unit of HCA Holdings Inc. (HCA:US) intends to sell $3 billion of senior secured notes, the Nashville, Tennessee-based company said today in a statement. Proceeds may be used to redeem $1.5 billion of 8.5 percent securities maturing in 2019 and $1.25 billion of 7.875 percent debt maturing in 2020, the largest for-profit hospital chain said in the statement.

The global speculative-grade default rate as measured by Moody’s ended 2013 at 2.9 percent and will finish this year at 2.2 percent, below the long-term average of 4.7 percent since 1983, according to a report from the ratings company.

“Looking ahead, we expect a somewhat lower corporate default rate in 2014 mainly given our expectations for relatively more robust economic growth,” Albert Metz, managing director of credit policy research at Moody’s, said.

The risk premium on the Markit CDX North American High Yield Index, tied to the debt of 100 speculative-grade companies, widened 8.6 basis points to 320.3, Bloomberg prices show. Speculative-grade bonds are rated below Baa3 by Moody’s and less than BBB- at Standard & Poor’s. A basis point is 0.01 percentage point.

The extra yield investors demand to hold investment-grade corporate bonds rather than government debt rose 0.7 basis point to 97.7, Bloomberg data show.

To contact the reporter on this story: Jessica Summers in New York at jsummers20@bloomberg.net

To contact the editor responsible for this story: Shannon D. Harrington at sharrington6@bloomberg.net


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