Corporate Credit Swaps in U.S. Fall; Shell Sells Two-Part Bonds

A gauge of U.S. corporate credit risk declined for a second day as lawmakers continued negotiations in an attempt to avoid the so-called fiscal cliff.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, dropped 1.5 basis points to a mid-price of 99.4 basis points at 4:18 p.m. in New York, according to prices compiled by Bloomberg. The measure pared some of its decline after House Speaker John Boehner said no substantive progress had been made in budget talks.

A compromise by politicians to avert $607 billion of spending cuts and tax increases set to take effect next year would allay investor concern that an economic slowdown will hinder companies’ ability to repay debt. Boehner told reporters in Washington that he remains “hopeful” about negotiations. Senator Charles Schumer said progress has been made.

“There’s no consistency” in lawmakers’ remarks on budget talks, Stephen Antczak, Citigroup Inc.’s New York-based head of U.S. credit strategy, said in a telephone interview. “One person says we’re making progress and the next one says we’re not close,” he said. “To the extent that uncertainty becomes clarified a little bit, that would help the market tremendously.”

A Bloomberg Global Poll today showed that three out of four investors expect President Barack Obama and congressional leaders to reach a short-term agreement. Treasury Secretary Timothy F. Geithner arrived at the Capitol today to face demands from Republican leaders to spell out spending cuts.

Royal Dutch

The credit-swaps index typically falls as investor confidence improves and rises as it deteriorates. 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.

Royal Dutch Shell Plc (RDSA), Europe’s largest oil producer, sold $1.75 billion of bonds in its first debt offering since August. The company issued $750 million of three-year notes to yield 30 basis points more than similar-maturity Treasuries and $1 billion of 10-year securities with 75 basis points of extra yield, according to data compiled by Bloomberg.

The average relative yield on investment-grade debt narrowed 1 basis point to 1.31 percentage points, led by spreads on the subordinated bonds of financial companies, which dropped 2 basis points to 2.38 percentage points, according to prices compiled by Bloomberg. A basis point is 0.01 percentage point.

Corporate Defaults

The number of defaults among global corporate issuers in 2012 increased to 74, Standard & Poor’s analysts wrote in a report today. Allen Systems Group Inc. was downgraded to D on Nov. 19 after missing an interest payment, and a confidential rated Brazil-based utility company defaulted yesterday, according to S&P.

Defaults among issuers of speculative-grade debt this year will increase to 30 in November and December, compared with 25 through October, according to a report today from Fitch Ratings. The high-yield default rate, which fell to 1.9 percent in October, will likely end 2012 at close to 2 percent, according to Fitch.

Credit-default swaps protecting against losses on the debt of Supervalu Inc. (SVU) surged 3.5 percentage points to 20.1 percent upfront as of 4:25 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.

That’s in addition to 5 percent a year, meaning it would cost $2.01 million initially and $500,000 annually to protect $10 million of the company’s debt. A planned sale of the grocery chain to Cerberus Capital Management LP has stalled because the private-equity firm has had trouble obtaining funds for a leveraged buyout, said people familiar with the matter who asked not to be named because the process is private.

To contact the reporter on this story: Peter Rawlings in New York at prawlings@bloomberg.net

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

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