Homebuilder Credit Risk Rises After U.S. Housing Starts Decline

The cost of protecting debt issued by homebuilders climbed as a report on December activity showed they began work on fewer homes than projected.

Credit-default swaps on KB Home, the Los Angeles-based homebuilder that targets first-time buyers, increased 4.1 basis points to 364.6 basis points, according to data provider CMA. Contracts on Lennar Corp. climbed 2.8 basis points to 330.9, the data show.

“The big things people are focusing on are unemployment numbers and the housing situation,” said Mirko Mikelic, a money manager for Fifth Third Asset Management in Grand Rapids, Michigan, who helps oversee $13 billion of fixed-income assets.

Housing starts fell 4.3 percent to a 529,000 annual rate, the lowest level since October 2009, Commerce Department figures showed today in Washington. The median forecast in a Bloomberg News survey called for a 550,000 rate. A jump in building permits, a proxy for future construction, may reflect attempts to get approval before changes in building codes took effect at the beginning of this year.

Swaps on KB Home have declined from 597.5 in July, and those on Lennar are down from 541.6 basis points in August, CMA data show. Companies including KB Home and Lennar project demand will be slow to rebound as elevated unemployment and mounting foreclosures discourage buyers.

“It’s a recovery, but it’s a very slow one,” Mikelic said. “It looks like it’s going to take some time.”

MGIC Losses

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 1.5 basis points to a mid- price of 84.1 basis points as of 4:57 p.m. in New York, according to index administrator Markit Group Ltd. The CDX index typically rises as investor confidence deteriorates and falls as it improves.

Credit-default swaps on MGIC Investment Corp. jumped by the most since May after the largest U.S. mortgage insurer posted a fourth-quarter loss, excluding some items, that was twice as wide as the average analyst estimate.

“We currently expect to continue to report annual net losses,” the company said in its statement. “Although we currently expect to return to profitability on an annual basis, we cannot assure you when, or if, this will occur.”

The contracts increased 33.8 basis points to 347.3, according to CMA. Swaps on Radian Group Inc. and PMI Group Inc. also climbed, adding 24.9 basis points to 436.2 and 37.7 basis points to 649.3, respectively, the data show. Lawmakers are trying to reduce government exposure to mortgage risk, which may determine the success or failure of mortgage insurance.

Flooding, Avalanches

Credit-default swaps on steel companies increased amid surging coal prices. Canada’s Teck Resources Ltd. said bad weather, a port equipment failure and avalanche conditions in British Columbia would mean lower coal sales this quarter, and BHP Billiton said Queensland, Australia, coal production was significantly affected by the persistent rain and flooding in the second quarter. Production declined by 30 percent, compared with the prior quarter, the company said.

Contracts on AK Steel Holding Corp., based in West Chester, Ohio, increased 15.5 basis points to 541.6, those on Pittsburgh, Pennsylvania-based United States Steel Corp. climbed 13.2 basis points to 383.5 and those on Richmond, Virginia-based Massey Energy Co. gained 15.1 basis points to 265.2, CMA data show.

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: 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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