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H&R Block Default Swaps Tumble After ‘Panic Selling’ Over Loans

Credit-default swaps on debt issued by H&R Block Inc. fell for the first time in almost two weeks as investors wagered the “panic” over soured mortgages may be overdone.

The annual cost to protect the bonds of Block Financial LLC, which issues all of Kansas City, Missouri-based parent H&R Block’s public corporate debt, for five years dropped 94.1 basis points to 737.8 at 4:30 p.m. in New York, according to data from CMA.

The contracts had more than doubled from 409.3 basis points on Oct. 11 through yesterday, after investors speculated the company’s $188 million repurchase reserves for potential losses on faulty mortgages would be inadequate. The tax preparer, which originated home mortgages through January 2008, may be forced to buy back bonds if loans were sold based on false or missing information.

The company “faces no near-term liquidity crunch,” according to a report by Kathleen Shanley, senior investment- grade analyst at Gimme Credit LLC, about the quality of Block Financial debt. “If we were already a holder, we’d be inclined to wait and see if the market stabilizes, rather than adding to what appears to be panic selling of this credit,” Shanley said.

One-year swaps on Block Financial fell 324.9 basis points to 737.8, after trading higher than the five-year contracts since Oct. 18, CMA data show.

Gimme Credit, an independent research service on corporate bonds, maintained its “underperform” rating on the company’s debt, the report said.

Bank Swaps

Today’s drop may be because of investors exiting bets that the company’s contracts will rise, according to Andrew Kuan, senior trader at Primus Asset Management in New York. The credit swaps aren’t frequently traded, which amplifies moves in both directions, he said.

Bank swaps also declined after jumping last week by the most since May. Contracts on Bank of America Corp. fell 5.4 basis points to 199.2 and those on Wells Fargo & Co. slipped 5 basis points to 116.5, according to CMA. Morgan Stanley swaps eased 6.9 basis points to 166.9 and those on Goldman Sachs Group Inc. fell 5.3 basis points to 136.9, CMA prices show.

“Mortgage putbacks have moved to the back burner for now,” Michael Reiner, a credit strategist at Societe Generale, wrote in a note today.

Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 0.8 basis point to a mid-price of 96.2 basis points, according to index administrator Markit Group Ltd. The index fell 2.7 basis points this week as corporate earnings came in better than forecast.

Beating Expectations

“For the most part, the earnings are much better than expected,” beating estimates by an average of about 10 percent said Mikhail Foux, credit strategist at Citigroup Inc.

Of the 132 companies in the Standard & Poor’s 500 Index that reported results since Oct. 7, 86 percent have beaten analysts’ per-share earnings estimates, according to data compiled by Bloomberg. Analysts surveyed by Bloomberg predict 26 percent growth in third-quarter profit from a year earlier for S&P 500 companies, the fourth straight quarterly increase.

The U.S. credit-swap index, which typically falls as investor confidence improves and rises as it deteriorates, touched the lowest in more than five months Oct. 13 at 95.5 basis points. Lows on the index may mean less room to turn a profit, according to Foux.

“The tighter we go, the closer we get to our yearend targets -- they’re within spitting distance,” Foux said. “We see less and less value in credit the more we rally.”

Reassigning Employees

Swaps on BellSouth Corp. eased, dropping 1 basis point to 41.3, while those on Dallas-based AT&T Inc. declined 2.1 basis points to 35, CMA data show. AT&T, the largest U.S. phone company reported earnings yesterday that matched analysts’ estimates as demand for Apple Inc.’s iPhone helped offset revenue declines in the traditional landline business.

Contracts on News America Inc., a unit of New York-based News Corp., jumped 1.4 basis points to 62.5, CMA data show, after the Post Chronicle reported the owner of the Twentieth Century Fox film studio and Fox News will reassign employees working on an online-subscription project, after failing to attract enough interest from other news organizations.

A Mexico-based mortgage and construction lender missed an interest payment on Oct. 15, bringing the total number of global corporate defaults this year to 69, according to a report by Standard & Poor’s.

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, 0.01 percentage point, equals $1,000 annually on a contract protecting $10 million of debt.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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