Credit Swaps in U.S. Rise as Manufacturing Contracts Globally

A benchmark gauge of U.S. company credit risk rose as manufacturing shrank in Europe and China and as Dutch Prime Minister Mark Rutte offered to resign.

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, climbed 1.2 basis points to a mid-price of 100.9 basis points at 5:01 p.m. in New York, according to prices compiled by Bloomberg. Contracts linked to Beam Inc. (BEAM), which is making the second-largest acquisition of a U.S. wine and spirits business since 2007, increased by the most in more than two months.

The default-swaps gauge increased after Euro-area services declined more than estimated in April, while data indicated China’s production will contract for a sixth month, according to Markit Economics and HSBC Holdings Plc. In the Netherlands, Rutte offered his Cabinet’s resignation after struggling to clinch an austerity deal.

“The U.S. may be impacted by slower global growth at a time when we are seeing weaker U.S. numbers,” Kingman Penniman, chief executive officer of KDP Investment Advisors Inc. in Montpelier, Vermont, said in a telephone interview. “Given the heightened uncertainty we have seen and how cheap hedging has been, it’s not a bad idea to guard your exposure.”

‘Fiscal Goals’

HSBC Holdings and Markit Economics reported a preliminary reading of 49.1 for their China purchasing managers’ index, compared with 48.3 in March. A reading below 50 indicates contraction. A euro-area index based on a survey of purchasing managers in manufacturing and services fell to 47.4, a five- month low, from 49.1 in March, Markit Economics said in an initial estimate.

“The core of Europe is beginning to push back against austerity, while the periphery also is slipping on its fiscal goals,” JPMorgan Chase & Co. credit analysts led by Eric Beinstein said in a research note today. Weak manufacturing numbers from Europe highlight “the challenging dynamic of austerity combined with recession throughout the EU,” they said.

Sovereign-debt risks may damp optimism from better-than- expected earnings numbers reported by American companies, despite the European Central Bank’s three-year long-term refinancing operation, according to KDP’s Penniman.

“With the LTRO, there was a belief that the liquidity problems had been solved in Europe and wasn’t going to create a sovereign concern,” Penniman said. “That honeymoon seems to be over.”

Vodka Acquisition

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.

Default swaps protecting Beam’s debt from default for five years increased by 7.9 basis points to 63.3 basis points at 5:16 p.m. in New York. The jump comes after the company, which commands about a third of the U.S. bourbon market, agreed to buy Pinnacle Vodka and Calico Jack Rum from White Rock Distilleries for $605 million.

Swaps on Beam increased by 15.5 basis points Feb. 17, according to prices compiled by Bloomberg. The company had $1.9 billion of total debt as of Dec. 31, the Deerfield, Illinois- based company said in its Feb. 29 annual filing.

Constellation Brands Inc. (STZ)’s acquisition of Fortune Brands Inc.’s wine unit for $885 million was the biggest takeover in the industry since 2007, according to data compiled by Bloomberg.

To contact the reporter on this story: Sridhar Natarajan in New York at snatarajan15@bloomberg.net

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

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.