Sept. 11 (Bloomberg) -- The risk of owning Freescale Semiconductor Inc.'s $843 million of debt quadrupled after Standard & Poor's said a leveraged buyout may lead to a non- investment grade rating, according to traders who bet on corporate creditworthiness in the credit-default swaps market.

The price of credit-default swaps based on the bonds of the third-largest U.S. computer-chip maker traded as high as $330,000 from $82,000 on Sept. 8, said Tim Backshall, a strategist at Credit Derivatives Research LLC. They later narrowed to $305,000, he said.

A rise indicates deterioration in the perception of credit quality; a decline suggests an improvement. Credit-default swaps are financial instruments based on corporate bonds and loans used to speculate on an increase or decrease in indebtedness.

Standard & Poor's and Fitch Ratings said they may lower their BBB- ratings on Austin, Texas-based Freescale because a takeover would add debt. A group of private-equity firms, including Blackstone Group LP and Texas Pacific Group, are bidding as much as $16 billion for Freescale, two people familiar with the talks said.

``It seems the pure mentioning of the three little letters, LBO, drives'' prices higher, Backshall, based in Walnut Creek, California, said in an interview. ``Everyone is on a bit of a hair trigger right now'' after credit default swap pries fell to a three-month low, he said.

A buyout would be the biggest ever of a technology company, eclipsing the $10.4 billion takeover of SunGard Data Systems Inc. by a group including Blackstone last year. Private equity firms typically borrow money to finance takeovers, adding debt to the target company.

S&P, Fitch Warnings

Freescale, spun off by Motorola Inc. in 2004, is in talks ``relating to a possible business transaction,'' Glaston Ford, a spokesman for the company, said. He declined to comment further.

``Fitch believes a potential transaction purchase price of $16 billion would result in a significant change in capital structure and non-investment grade ratings,'' Fitch analysts Jason Pompeii and Nick Nilarp said in a research note. ``Fitch would remove the warning should Freescale announced that it had ceased talks regarding a possible business transaction.

Freescale already has high-yield, high-risk, or junk, ratings of Ba1 at Moody's Investors Service. Ratings below BBB- at S&P and Baa3 at Moody's are considered junk.

Price Triples

The contracts, sold by financial firms such as JPMorgan Chase & Co. and HSBC Holdings Plc in London, pay $10 million in exchange for the notes should the company default in the next five years. An increase in price signals perceptions of credit quality are deteriorating, a decrease indicates an improvement.

Freescale's $500 million of 7.125 percent notes maturing in 2014 rose more than 2 cents on the dollar to 105.3 cents, according to Trace, the bond price reporting service of the NASD. The rally pushed the yield down to 6.27 percent from 6.61 percent. The note was the most traded on Trace among institutional investors at 4:43 p.m. today in New York, with 49 trades over $1 million.

Documents that govern the notes say that Freescale must repay them at 101 percent for face value in the event of a ``change of control'' of the company, according to Fitch.

The overall perception of North American corporate credit quality deteriorated today, as measured by the Dow Jones North America Crossover index, which includes 35 companies with investment-grade and high-risk, high-yield ratings.

The index rose about 0.48 percent to the equivalent of about $182,375, according to data compiled by Bloomberg. Before today, the index was at its lowest since June 2. Companies in the index, which doesn't include Freescale, have more than $190 billion of bonds outstanding.

Credit-default swaps, the fastest growing derivatives market, have become the best gauge of shifts in credit quality. The market has grown seventeen fold in five years to $346 billion, according to the International Swaps and Derivatives Association.

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.

To contact the reporter for this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net

Last Updated: September 11, 2006 16:58 EDT