The cost of protecting bonds from default in the U.S. climbed to the highest level in more than five weeks as investors speculated Ireland’s aid package may not stem Europe’s sovereign debt crisis.
The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 1.4 basis points to a mid-price of 96.9 basis points as of 5:36 p.m. in New York, according to index administrator Markit Group Ltd. Swaps on ConAgra Foods Inc. led gains in food companies after a group of private-equity firms agreed to buy Del Monte Foods Co., sparking speculation by traders and analysts on other takeover targets.
“The sovereign situation is still the dominant story here, even though it’s more of an indirect effect,” said Michael Reiner, a New York-based credit strategist with Societe Generale SA. “It’s the fear trade.”
Ireland, swamped by the bursting of a decade-long real- estate bubble and unemployment approaching 14 percent, became the second country after Greece to tap European assistance. Italy’s borrowing costs rose, signaling investors believe more aid will be required for Europe’s indebted nations, overshadowing figures from the National Retail Federation that showed shoppers in the U.S. spent 6.4 percent more than last year over the holiday weekend.
The Markit index, which typically rises as investor confidence deteriorates and falls as it improves, is at the highest since Oct. 21, when it reached 97, Markit data show. It rose 5.8 basis points last week.
Contracts on Goldman Sachs Group Inc. climbed 2.7 basis points to 146.6, CMA data show. Swaps on Bank of America Corp. added 2.7 basis points to 195.6 and those on Morgan Stanley increased 2.4 basis points to 185.8, the data show.
The cost to protect the bonds of ConAgra Foods jumped 9.9 basis points to 106.8, the highest level since December 2008, CMA data show. The maker of Banquet and Healthy Choice dinners is cheap enough to be a possible takeover target, according to a report by Credit Suisse Group AG.
“Management doesn’t sound like it is weighing the LBO option very seriously, but CEO Gary Rodkin does sound frustrated with the company’s stock,” Robert Moskow, a Credit Suisse AG analyst in New York, said in the report dated today. “An LBO may be his best end-game in a limited set of options.”
The shares of Omaha, Nebraska-based ConAgra rose 15 cents, or 0.7 percent, to $21.77.
The report also named Tyson Foods Inc. and Sara Lee Corp. as candidates after the “successful private equity bid” for Del Monte, Moskow wrote. Contracts on Springdale, Arizona-based Tyson Foods increased 4.3 basis points to 195.5 and those on Sara Lee, in Downers Grove, Illinois, gained 0.1 basis point to 123.3, CMA data show.
“Food companies in general are well-suited for leveraged deals because they have strong brands that generate stable cash flow and strong operating margins,” Moskow said, estimating each of the three could provide a five-year annual return of 19 percent or more to an acquirer.
Private-equity firms pool money from investors and obtain debt to finance takeovers with the intention of selling the companies later for a profit. Firms focus on the cash flow of their targets because they use it to service their debts.
KKR & Co., Vestar Capital Partners and Centerview Partners will pay $19 a share in a cash transaction, San Francisco-based Del Monte said in a Nov. 25 statement. The buyers will assume about $1.3 billion in debt. The deal will likely close in March, unless Del Monte finds a better offer before Jan. 8, according to the statement.
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.
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