U.S. Company Credit Risk Declines to Lowest Since May, Default Swaps Show

A gauge of U.S. corporate credit risk fell to the lowest in more than two months as manufacturing slowed less than economists had forecast, spurring investor optimism that the economy may avoid a double-dip recession.

The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declined 5.24 basis points to a mid-price of 99.15 basis points, the lowest since May 12, according to Markit Group Ltd. The index typically falls as investor confidence improves and rises as it deteriorates.

The Markit index declined by the most since May 31 as the Institute for Supply Management’s manufacturing gauge dropped to 55.5 last month from 56.2 in June. A reading greater than 50 points to expansion, and the median forecast of economists surveyed by Bloomberg News was 54.5. Swaps on Ford Motor Co. fell as its ranking was raised by Standard & Poor’s.

“You can see how sensitive the market is to data that is either slightly stronger than expected or that doesn’t point directly to a double dip,” Jason Quinn, co-head of high-grade and high-yield flow trading at Barclays Capital in New York. “I think we’re in this window where we’re getting a little bit more momentum to the upside.”

Swaps tied to Ford dropped 19.3 basis points to 546.8 basis points, CMA prices show. The company’s credit rating was raised two steps to B+, the fourth level below investment-grade, from B-, S&P said today in a statement. The outlook is positive, indicating there’s at least a one-in-three chance that S&P may raise Ford’s corporate credit rating in the next 12 months.

‘Substantial’ Cash Balances

The automaker, based in Dearborn, Michigan, has “substantial” cash balances and likely will continue to generate free operating cash flow, the ratings firm said.

Ford, last year’s biggest issuer of high-yield corporate debt, on July 28 sold $1.25 billion of 6.625 percent notes due in 2017 at a yield of 6.9 percent through its finance unit, according to data compiled by Bloomberg.

The Ford Motor Credit Co. debt rose 0.688 cent to 99.875 cents on the dollar, yielding 6.6 percent, or 370.9 basis points more than similar-maturity Treasuries, as of 12:50 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Swaps tied to Newell Rubbermaid Inc. fell 13.6 basis points to 112 basis points, CMA prices show. The maker of Calphalon cookware and Sharpie markers sold $550 million of 10-year notes that yield 175 basis points more than similar-maturity Treasuries, Bloomberg data show.

Proceeds will be used to help fund a tender offer for Newell’s 10.6 percent notes due 2019 and the repurchase of $500 million of its stock, the Atlanta-based company said in a statement distributed by Business Wire.

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.

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

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.