Credit Swaps in U.S. Jump on Signs Europe’s Crisis Is Spreading

A gauge of U.S. company debt risk rose a third day after Moody’s Investors Service cut its outlook on the top credit ratings of Germany, the Netherlands and Luxembourg, fueling concern Europe’s fiscal crisis is spreading.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark used to hedge against losses on corporate debt or to speculate on creditworthiness, rose 3.2 basis points to a mid-price of 116.6 basis points, the highest since June 28, prices compiled by Bloomberg show. Swaps tied to Lexmark International Inc. (LXK) soared to a record and Peabody Energy Corp. (BTU) contracts reached the highest since April 2009 as profit forecasts fell short of analyst estimates.

Investor concern is escalating this week that contagion from the euro-area’s financial turmoil will contaminate global balance sheets and hamper borrowers’ ability to repay debt. Moody’s yesterday cited “rising uncertainty” over Europe’s crisis as it lowered its outlook to “negative” on the Aaa credit ratings of Germany, the Netherlands and Luxembourg.

The move “is a response to the deepening pressures within the euro area and a reflection that the bailout mechanisms have put an increasing burden on a dwindling number” of financially stable countries in the currency bloc, Edward Marrinan, macro credit strategist at Royal Bank of Scotland Plc in Stamford, Connecticut, said in a telephone interview.

Troika Meets

Finland was the only country in the currency bloc to keep a stable outlook for its Aaa credit grade. A report showed euro- area services and manufacturing output contracted for a sixth month in July, London-based Markit Economics said today.

The troika of Greece’s international creditors, the European Commission, the European Central Bank and the International Monetary Fund, returned to Athens today to review the nation’s progress in meeting debt reduction targets. Prime Minister Antonis Samaras must outline 11.5 billion euros ($13.9 billion) of budget cuts to maintain access to bailout funds.

Contracts on Goldman Sachs Group Inc. (GS) rose 14.8 basis points to a mid-price of 302.8 basis points, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

The rise is “in line with just the general concern about Europe,” Mirko Mikelic, a money manager at Fifth Third Asset Management in Grand Rapids, Michigan, said in a telephone interview. “Everyone has got an eye on what’s going on over there. Hang onto our seats. It’s always something new in terms of another region in Spain or something else or potential downgrades.”

Lexmark Swaps

The cost to guard against losses on the debt of Lexmark jumped 93.8 to 644.7, according to CMA. The contracts, which typically rise as investor confidence deteriorates and fall as it improves, have jumped 258.9 basis points since July 9.

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.

Lexmark said today third-quarter profit excluding some items will be 75 cents to 85 cents a share, compared with an average analyst estimate of 89 cents, Bloomberg data show. Second-quarter earnings dropped 61 percent as the turmoil in Europe weakened overseas demand, the Lexington, Kentucky-based maker of laser and inkjet printers said in a statement.

“A number of U.S. companies are making it clear that the global economic slowdown is taking a toll on their earnings performance,” Marrinan wrote in an e-mail. “This somewhat offsets” earnings reports by companies that are beating analyst expectations, he said.

Swaps tied to Peabody jumped 25 to 470, CMA prices show. The largest U.S. coal producer said today that third-quarter profit excluding one-time items will be 20 cents to 45 cents a share, missing the average estimate of 65 cents by 23 analysts surveyed by Bloomberg News.

To contact the reporter on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net

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

Bloomberg reserves the right to edit or 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.