Corporate Credit Risk Rises as Markets Absorb New Debt Issuance

March 11 (Bloomberg) -- The cost to protect against defaults on U.S. corporate bonds increased as credit markets had to absorb a 57 percent jump in weekly company debt sales.

Credit-default swaps on the Markit CDX North America Investment Grade Index Series 13, which is linked to 125 companies, rose 0.5 basis point to a mid-price of 83.5 basis points, according to broker Phoenix Partners Group. The gauge typically rises as investor confidence deteriorates and falls as it improves. Swaps on Bank of America Corp. and Citigroup Inc. advanced, according to CMA DataVision prices.

Credit-default swaps are pausing after the index rallied 23.7 basis points from a high of 106.24 this year, CMA prices show. U.S. borrowers have taken advantage of cheaper credit to issue debt, leaving investors to digest sales of at least $31 billion of bonds this week, compared with $19.7 billion in the previous period, according to data compiled by Bloomberg.

“You’ve had a decent amount of new-issue supply come to market the last few days,” said Rizwan Hussain, a U.S. credit strategist at Morgan Stanley in a telephone interview.

The Markit index has fallen 2.1 basis points from the beginning of the year, CMA prices show.

The trade deficit in the U.S. narrowed in January as imports fell for the first time in five months, indicating cooling demand, Commerce Department figures showed today in Washington. Exports decreased for the first time in nine months.

“The somewhat disappointing trade data seem likely to prove a brief pause in a generally improving trend,” said David Resler, chief economist at Nomura Securities International Inc. in New York.

Citigroup Rises

Credit swaps on Citigroup increased 3 basis points to 171.5 basis points and those on Bank of America rose 4.5 basis points to 125 basis points, CMA prices show. A basis point is 0.01 percentage point.

Citigroup Chief Executive Officer Vikram Pandit said today at an investor conference in New York that he “wouldn’t be surprised” if the government were considering a sale of its 27 percent stake in the U.S. bank.

Contracts linked to First Data Corp. increased to 12.19 percentage points upfront from 10.25 percentage points yesterday, CMA prices show. That means the cost to protect $10 million of debt rose to $1.22 million initially and $500,000 annually.

First Data posted a $369 million fourth-quarter loss, the Greenwood Village, Colorado-based company owned by KKR & Co. said today in a statement. Adjusted earnings before interest, taxes, depreciation and amortization were $530 million compared with $645 million during the similar period a year ago.

Changing CEOs

KKR also named Michael Capellas as senior adviser focusing on technology and replaced him as First Data’s chief executive officer with Joe Forehand on an interim basis.

“They have a capital structure that’s going to be challenged with the weaker earnings,” said Raymond Kennedy, a money manager at Los Angeles-based Hotchkis & Wiley Capital Management LLC, which oversees about $80 million in high-yield debt. “They’re in a tough market in a tough economy.”

The electronic-commerce company’s 10.55 percent payment-in- kind notes due in September 2015 fell the most ever, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. They dropped 6.8 cents on the dollar to 85.2 cents to yield 14.9 percent as of 4:15 p.m. New York time.

Swaps on Devon Energy Corp. fell 3.5 basis points to 49 basis points, CMA DataVision prices show. BP Plc will pay Devon Energy $7 billion for assets in Brazil, the Gulf of Mexico and Azerbaijan.

Devon’s sale is “a major advancement of its strategic repositioning initiative announced in November,” Philip Adams, a bond analyst at Gimme Credit LLC in Chicago, wrote today in a report.

Credit swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point equals $1,000 annually on a contract protecting $10 million of debt for five years.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net