Credit-Default Swaps in U.S. Climb From About Two-Month Low
A benchmark gauge of U.S. company credit risk climbed from about a two-month low on concern Europe’s sovereign-debt crisis is harming the region’s banks.
The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, added 0.6 basis point to a mid-price of 118.6 basis points at 5:19 p.m. in New York, according to Markit Group Ltd. Credit- default swaps on Eastman Kodak Co. (EK) jumped to a record after a report that the imaging company may be preparing for a bankruptcy filing.
The swaps gauge, which typically rises as investor confidence deteriorates and falls as it improves, increased as much as 2.4 basis points after UniCredit SpA (UCG)’s plan to sell shares stoked speculation that European financial institutions will need to raise more capital. The European Central Bank said overnight deposits from financial institutions rose to an all- time high of 453.2 billion euros ($585.7 billion) yesterday, underscoring banks’ reluctance to lend to each other.
UniCredit’s equity offering “highlighted” a need and ability to access capital for banks in Europe, Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. in New York, said in a telephone interview today. “Does that come back to haunt any financial institutions in the U.S.?”
The index reached 117.6 basis points yesterday, the lowest level since Oct. 31. 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.
One-year credit-default swaps tied to Kodak’s debt surged to a record, jumping 8.2 percentage points to 66.2 percent upfront, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. That means the upfront cost on a contract protecting $10 million of Kodak’s debt would be $6.62 million.
Rochester, New York-based Kodak, which lost 88 percent of its market value last year, is preparing for a bankruptcy filing this month or early February should its effort to sell patents fail, the Wall Street Journal reported today, citing people familiar with the matter.
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