HP Credit-Default Swaps Decline After Profit Surpasses Estimates

The cost to protect against losses on the debt of Hewlett-Packard Co. (HPQ) dropped by the most since October as the company reported a quarterly profit that beat estimates, increasing hopes of a turnaround.

Contracts on Palo Alto, California-based HP fell 12 basis points to a mid-price of 195.5 basis points as of 3:11 p.m. in New York, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. That’s the biggest drop since the contracts tightened by 20.6 basis points on Oct. 27.

Chief Executive Officer Meg Whitman is cutting jobs and streamlining businesses as the company battles slower demand for printers, services and data-center equipment. Its credit grade was cut by each of the three biggest ratings firms in the last 12 months as its long-term debt almost doubled in the past two years. Profit before some costs in the second quarter was 98 cents a share, the company said in a statement yesterday. That compared with analysts’ 91-cent average estimate.

“They reiterated their commitment to avoiding acquisitions and limit share repurchases,” said Michael Holt, an analyst at Chicago-based Morningstar Inc. (MORN) “Talk is cheap so people relax a little bit when they see the evidence.”

Credit Rating

The company’s $1.2 billion of 6 percent notes maturing in September 2041 rose 2.9 cents to 106.5 cents on the dollar at 3:24 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bonds yield 5.55 percent.

HP’s credit rating was reduced within the last year to A3 by Moody’s Investors Service, to A by Fitch Ratings and to BBB+ by Standard & Poor’s. The swaps on the company have more than doubled from 94.5 basis points in March.

The computer services-provider announced plans to cut approximately 27,000 jobs, generating savings of as much as $3.5 billion starting in 2014, Whitman said in a call with investors. HP had $25.8 billion of long-term debt as of April 30, according to a regulatory filing yesterday.

“It’s a positive for the long-term health of the business and that’s good for the bondholders,” Holt said.

A gauge of U.S. corporate credit risk declined as Italian Prime Minister Mario Monti told a television station that Greece is likely to stay in the euro.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 0.8 basis point to a mid-price of 117.4 basis points at 4:59 p.m. in New York, according to prices compiled by Bloomberg.

The swaps gauge typically decreases as investor confidence improves and rises as it deteriorates. 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: Sridhar Natarajan in New York at snatarajan15@bloomberg.net

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

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