Credit Risk Falls in Europe as Earnings Outweigh Hurricane Woes

Corporate credit risk fell for the first time in almost two weeks in Europe after BP Plc (BP/) and Deutsche Bank AG posted earnings that beat estimates, helping ease concerns Hurricane Sandy will damage the U.S. economy.

The Markit iTraxx Crossover Index of swaps linked to the debt of 50 mostly junk-rated European companies dropped 14.5 basis points to 529.5 at 11:37 a.m. in London, according to prices compiled by Bloomberg, the first decline since Oct. 17.

Deutsche Bank, Europe’s biggest lender, reported net income of 747 million euros ($966 million) in the three months through September, beating all seven analyst estimates compiled by Bloomberg. BP Plc, the region’s second-largest oil company, lifted its dividend as third-quarter net income climbed to $5.4 billion from $5 billion in the same period of 2011.

“Markets are certainly trending higher despite the U.S. problems and the earnings have helped the more positive mood,” said Bill Blain, a London-based credit strategist at Mint Partners Ltd., a division of BGC Brokers LP. “Because of the U.S. problems traders naturally took a protective stance, which is now being unwound.”

Hurricane Sandy’s economic toll is poised to exceed $20 billion after the biggest Atlantic storm slammed into the Eastern U.S., damaging homes and offices and flooding subways in America’s most populated city.

Bonds Climb

Deutsche Bank’s 4.2 percent bond due 2017 rose 0.7 percent to 110.9 cents on the euro, the biggest rise since May 30, Bloomberg Bond Trader prices show. This cut the yield to 1.7 percent. Credit-default swaps tied to Deutsche Bank’s bonds fell three basis points to 131.

Bond sales were limited to the safest assets as Landesbank Hessen-Thueringen Girozentrale, also known as Helaba, and Norwegian mortgage lender Terra Boligkreditt AS tapped markets for covered bonds. The notes typically get high credit ratings because they’re secured on mortgages or public-sector loans as well as a guarantee by the issuer.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 3.25 basis points to 129.25. Bank credit risk also dropped, with the Markit iTraxx Financial Index on the senior debt of 25 banks and insurers down 7.5 basis points at 175.5.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a contract protecting 10 million euros of debt for five years is equivalent to 1,000 euros a year.

To contact the reporter on this story: Hannah Benjamin in London at hbenjamin1@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net

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