Lexmark Credit-Default Swaps Surge to Record on Inkjet Sale Plan
The cost to protect against losses on Lexmark International Inc. (LXK)’s debt surged to a record after the U.S. printer maker said it’s exploring a sale of its inkjet technology and buying back shares.
Credit-default swaps tied to the Lexington, Kentucky-based company climbed 80.3 basis points to 650.3 basis points as of 4:30 p.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The contracts, which are trading at the highest on record, have climbed from 284.3 basis points since the end of May, data compiled by Bloomberg show.
Lexmark is among printer manufacturers including Canon Inc. (7751) and Xerox Corp. (XRX) that have cut earnings forecasts this year citing weaker office-equipment sales in Europe. The company is working with advisers for options to sell its inkjet-related technology, Lexmark said in a statement today. Lexmark also said it will buy back an additional $100 million shares, and that the board has authorized as much as $251 million in future repurchases.
“Today’s announcement represents difficult decisions, which are necessary to drive improved profitability,” Lexmark Chief Executive Officer Paul Rooke said in the statement about the restructuring. “Our investments are focused on higher-value imaging and software solutions.”
The restructuring will cost the company $160 million, with $110 million of that this year, Lexmark said. Cash flow will be reduced by $75 million, with $40 million of that in 2012.
A gauge of corporate credit risk increased for the first time in three days as consumer confidence slid. The Markit CDX North America Investment Grade Index, a credit swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, added 0.8 basis point to a mid-price of 101.1 basis points at 5:04 p.m. in New York, according to prices compiled by Bloomberg.
The swaps index rose after a report showed U.S. consumer confidence fell by the most in 10 months as households grew more pessimistic, while a reduced economic assessment from Japan highlighted risks of a further global slowdown. Investors are concerned that weakening economic activity may taint corporate balance sheets and reduce companies’ ability to repay debts.
The credit swaps measure, which typically rises as investor confidence deteriorates and falls as it improves, is up from 98.5 basis points on Aug. 20. The contracts 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.
A report tomorrow on U.S. gross domestic product may show faster growth in the world’s largest economy. Federal Reserve Chairman Ben S. Bernanke will give a speech on Aug. 31 at an annual meeting in Jackson Hole, Wyoming, which investors are awaiting to gauge the outlook for monetary policy.
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