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U.S. Corporate Credit Swaps Climb as Business Activity Shrinks

September 28, 2012

A gauge of U.S. corporate credit risk rose for the first time in three days on reports that showed economic growth is weakening.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 0.9 basis point to a mid-price of 99.4 basis points at 12:56 p.m. in New York, according to prices compiled by Bloomberg. The index was updated last week, replacing companies that no longer had appropriate grades or whose contracts aren’t among the most actively traded.

The measure increased as business activity in the U.S. unexpectedly contracted in September for the first time in three years, according to the Institute for Supply Management-Chicago Inc., stoking concern that the downturn may impair companies’ ability to repay debt. The Thomson Reuters/University of Michigan index of consumer sentiment rose to 78.3 this month from 74.3 in August, short of the 79 median estimate of economists in a Bloomberg survey.

Yields on company debt have fallen so low that investors end up in a “lose-lose situation,” Robert Grimm, head of high- yield trading at Odeon Capital Group LLC in Greenwich, Connecticut, said in a telephone interview. “If the world gets better then interest rates go up, and if the world gets worse then credit gets worse.”

NBCUniversal Media

The credit swaps index typically increases as investor sentiment 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.

NBCUniversal Media LLC, the media company owned by Comcast Corp. (CMCSA:US), plans to sell $2 billion of 10- and 30-year notes, according to a person familiar with the deal. The bonds, which will be used to increase working capital and for general corporate purposes, may be rated two levels above junk at Baa2 by Moody’s Investors Service and the third-lowest investment grade at BBB+ by Standard & Poor’s, said the person, who asked not to be identified because terms aren’t set.

The average relative yield on speculative-grade debt widened by 1 basis point, led by the bonds of utility and consumer companies, which increased 2 basis points, according to data compiled by Bloomberg.

RadioShack CDS

Credit swaps tied to RadioShack Corp. (RSH:US) rose 1.8 percentage points to 38.8 percent upfront as of 12:30 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 in addition to 5 percent a year, meaning it would cost $3.88 million initially and $500,000 annually to protect $10 million of RadioShack’s debt for five years. Chief Executive Officer James Gooch left this week after 16 months on the job.

To contact the reporter on this story: Peter Rawlings in New York at

To contact the editor responsible for this story: Alan Goldstein at

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