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U.S. Corporate Credit Risk Index Falls as Bets Ease on Europe Debt Crisis
A gauge of corporate credit risk in the U.S. fell, tracking a rally in stocks amid diminished bets that Europe’s debt crisis will worsen.
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, fell 1.7 basis points to a mid-price of 105.3 basis points as of 5:04 p.m. in New York, according to Markit Group Ltd. Contracts on banks including Goldman Sachs Group Inc. and Citigroup Inc. also declined, paring yesterday’s increases, the biggest in four weeks.
Credit swaps fell as the Standard & Poor’s 500 Index erased much of yesterday’s 1.2 percent decline and as credit traders reduced wagers that Europe’s government debt struggles will worsen. Portugal’s sale of bonds maturing in 2021 attracted higher demand compared with a previous offering. The eased concerns may only be temporary as demand for government debt is buttressed by European central banks, said Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California.
“It feels like a pause rather than any real sentiment improvement,” Backshall said.
The Markit CDX index, which yesterday rose for the first time in four trading sessions after reaching a four-week low on Sept. 3, typically increases as investor confidence deteriorates and falls as it improves.
Stocks Rise
Stocks climbed today after Portugal’s sale of bonds due 2021 attracted bids for 2.6 times the amount offered, compared with a bid-to-cover ratio of 1.6 in the earlier March sale. The S&P 500 Index gained 0.6 percent.
European central banks bought Greek, Irish and Portuguese bonds, according to a trader involved in the transactions, as the securities’ premiums to German debt rose for a third day. The trader spoke under the condition of anonymity because the bank’s transactions are confidential. A European Central Bank press officer declined to comment.
Credit-default swaps protecting against a default by Portugal fell 6 basis points to 325 basis points, according to data provider CMA. Swaps on Ireland declined 10.5 basis points to 371.
The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 0.6 basis point to 109 basis points, Markit prices show.
Swaps on Goldman Sachs fell 4.5 basis points to 152 basis points and contracts linked to Citigroup declined 3.4 basis points to 175.2, according to CMA.
Swaps on Pactiv
Contracts on Pactiv Corp. jumped to a record and its bonds fell as Reynolds Group Holdings Ltd., which is acquiring the Hefty trash-bag maker in a $6 billion deal, said that existing Pactiv bondholders won’t benefit from guarantees or collateral backing new debt that will fund most of the acquisition cost.
“It looks like they’re able to do the financing without having to pay the existing Pactiv bondholders,” said Rosemary Sisson, an analyst at broker-dealer Knight Libertas LLC in Greenwich, Connecticut. “Some people had hoped they would be taken out or that they would be ratably secured with” the new secured debt.
Pactiv bond indentures include a so-called negative pledge clause, in which the company agreed not to take on new secured debt without providing that the old bonds are “secured equally and ratably” with the new debt, according to regulatory filings.
Pactiv Bonds Fall
Reynolds plans to fund the purchase with $1.5 billion of loans from an amended senior secured credit facility and $3.5 billion in new senior debt, $2 billion of which will be secured, according to a statement today by the company, a unit of New Zealand-based Rank Group Ltd.
Pactiv swaps jumped 65 basis points to 501 basis points, according to CMA.
Its $300 million of 8.125 percent notes due in 2017 fell 3.5 cents to 96.25 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
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: Shannon D. Harrington in New York at sharrington6@bloomberg.net
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