Corporate Credit Swaps in U.S. Rise; Warner Music Selling Bonds
A gauge of U.S. corporate credit risk climbed for the second day after earnings of companies from General Electric Co. to McDonald’s Corp. fell short of estimates.
The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, rose 2.7 basis points to a mid-price of 93.6 basis points at 4:26 p.m. in New York, according to prices compiled by Bloomberg. Contracts tied to Advanced Micro Devices (AMD) Inc. rose to the highest in almost three years.
The measure increased as General Electric, McDonald’s and Microsoft Corp. all posted profit that was less than analysts had estimated, fueling concerns that the economic recovery is weakening. That can heighten investor concern about companies’ ability to repay debt.
“Earnings misses really can’t be a good thing,” Stephen Antczak, Citigroup Inc.’s New York-based head of U.S. credit strategy, said in a telephone interview. “The vulnerability to any negative headline is probably a little greater than anybody expects.”
The credit-swaps index typically rises as investor confidence deteriorates and falls as it improves. 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.
Warner Music Group Corp., the music and entertainment company acquired by Access Industries Holdings Inc. in 2011, plans to sell the equivalent of $635 million of bonds in U.S. dollars and euros. The company, through WMG Acquisition Corp., is issuing the eight-year notes to repay existing debt, according to a person familiar with the offering who asked not to be identified because terms aren’t set.
The U.S. two-year interest rate swap spread, a measure of stress in credit markets, rose 1.12 basis points to 10.5 basis points. The measure, which rises when investors seek the perceived safety of government securities and falls when they favor assets such as corporate bonds, touched the narrowest on an intraday basis this week since at least 1988, or as far back as Bloomberg tracks data.
The average relative yield on speculative-grade debt rose 4 basis points, led by spreads on the bonds of technology companies, which widened 14 basis points. The average relative yield on investment-grade issuance climbed 1 basis point.
The risk premium on the Markit CDX North America High Yield Index, a gauge of U.S. speculative-grade corporate debt risk, rose for a second day, climbing 15.1 basis points to a mid-price of 483.5 basis points, Bloomberg prices show.
Credit swaps tied to Advanced Micro Devices rose 7.3 percentage points to 18.2 percent upfront, the highest since November 2009, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
That’s in addition to 5 percent a year, meaning it would cost $1.82 million initially and $500,000 annually to protect $10 million of the company’s debt for five years. The second- largest maker of processors for personal computers said yesterday it will cut 15 percent of its staff and forecast fourth-quarter sales that will miss analysts’ estimates.
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