Credit Swaps in U.S. Rise for Second Day; Bombardier Plans Bonds

A gauge of U.S. corporate credit risk increased for a second day from the lowest level in almost four months.

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, added 1.2 basis points to a mid-price of 86.7 basis points at 4:31 p.m. in New York, according to prices compiled by Bloomberg. The measure has risen from 84.9 on Jan. 7, the least since Sept. 14.

Investors are awaiting corporate earnings for indications of whether a faltering economy may impair balance sheets and hinder companies’ ability to repay debt. Alcoa Inc. (AA), the largest U.S. aluminum producer, started the earnings season, reporting fourth-quarter sales of $5.9 billion after the market closed yesterday, which beat the $5.6 billion average of 11 estimates.

“Investors are going to turn to earnings now, and we’ll see if they beat expectations,” Scott Carmack, a portfolio manager at Leader Capital Corp. in Portland, Oregon, said in a telephone interview. “Alcoa was a decent number; that’s going to make the market feel a lot better. As long as the earnings season isn’t egregious, I think this market has room to run.”

Bombardier Offering

Fourth-quarter earnings at companies in the Standard & Poor’s 500 Index probably rose 2.9 percent, according to analyst estimates compiled by Bloomberg.

“There was some expectation Alcoa was going to have pretty decent numbers,” Jon Duensing, head of corporate credit at Smith Breeden Associates, said in a telephone interview from Boulder, Colorado. “The surprise was the outlook for aluminum demand, and that ties back into China and global growth. As we get into the meat of earnings, maybe that’s a catalyst.”

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.

Bombardier Inc. (BBD/B) is reviving a sale of high-yield, high-risk bonds that was delayed after its credit rating was cut Nov. 14. The maker of the Learjet and Challenger aircrafts doubled the sale to $2 billion, said a person familiar with the deal who asked not to be identified because terms aren’t set.

The average relative yield on junk-rated debt fell 2 basis points to 4.83 percentage points today, led by spreads on the bonds of materials companies, which dropped 6 basis points to 4.55 percentage points, Bloomberg data show. Junk debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- at S&P. A basis point is 0.01 percentage point.

ArcelorMittal Swaps

Moody’s trailing 12-month global speculative-grade default rate declined to 2.6 percent in the last three months of 2012 from 3.2 percent in the third quarter, according to a report by the ratings company dated yesterday.

The risk premium on the Markit CDX North American High Yield Index rose 1 basis point to 445 basis points, according to prices compiled by Bloomberg.

Credit swaps protecting against losses on the debt of ArcelorMittal (MT) fell 34.6 basis points to 345.4 basis points as of 3:30 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 steelmaker plans to raise about $3.5 billion by selling shares and bonds that automatically become stock to lower its debt, the Luxembourg-based company said in a statement today. ArcelorMittal (MT) said the sale, along with other initiatives, will help cut obligations to about $17 billion by the end of June.

To contact the reporter on this story: Julia Leite in New York at jleite3@bloomberg.net

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

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