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Credit Swaps in U.S. Fall in Bet Europe Crisis Will Be Contained

A gauge of corporate credit risk fell to a three-month low as investors speculate that Europe’s sovereign crisis won’t affect U.S. corporate balance sheets.

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, declined 1.2 basis points to a mid-price of 98.5 basis points at 5:16 p.m. in New York, according to prices compiled by Bloomberg. Credit swaps tied to H&R Block Inc. (HRB) dropped after it announced a new credit facility.

Signs of improvement in an economy where the unemployment rate has been more than 8 percent for 42 months may ease concern that a global slowdown will taint corporate balance sheets and undermine companies’ ability to repay debt. Debt investors are shaking off the Bundesbank monthly report today that said government bond purchases “entail significant stability risks.” Of the 477 companies in the Standard & Poor’s 500 Index, 68 percent reported earnings that beat analysts’ estimates, Bloomberg data show.

The index is declining in a “continuation of the past few weeks,” according to Joel Levington, managing director for corporate credit at Brookfield Investment Management Inc. in New York. “Benign earnings season and summer lull” are “keeping volatility quite low for the time being,” he said in an e-mail.

The credit swaps index, which typically falls as investor confidence improves, is trading at the lowest level since May 3. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.

Financial Flexibility

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings decreased 3.6 basis points to 141, and the Markit iTraxx Crossover Index of credit swaps on 50 companies with mostly high-yield credit ratings dropped 13.2 to 569.8, Bloomberg prices show.

Credit swaps tied to Block Financial LLC, the finance arm of H&R Block, the biggest U.S. tax preparer, dropped 66.8 basis points to 370.7, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Block Financial entered into a five-year, $1.5 billion credit and guarantee agreement expiring Aug. 17, 2017, for “general corporate purposes or working capital needs,” the Kansas City, Missouri-based tax preparer said in a statement today.

“This agreement gives us significant financial flexibility and further demonstrates the confidence our banking partners have in our business,” Greg Macfarlane, H&R Block’s chief financial officer, said in the statement.

The swaps are down from as high as 609.5 basis points in December, or $609,500 annually on a five-year contract protecting $10 million of debt, Bloomberg data show.

To contact the reporters 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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