U.S. Credit Swaps Climb for Second Day; Capital One Issues Bonds

A gauge of U.S. corporate credit risk climbed for a second day after Cypriot lawmakers rejected a levy on bank deposits, stoking speculation of renewed tumult in the euro area.

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, increased 1.4 basis points to a mid-price of 81.8 basis points at 4:36 p.m. in New York, according to prices compiled by Bloomberg. It had fallen by as much as 0.7 earlier in the day.

In a show of hands today, Cyprus’s legislators voted 36 against to none in favor of the proposal, which is intended to defray the cost of a rescue package. After the decision, the European Central Bank reaffirmed its commitment to provide liquidity “as needed within the existing rules” in a statement. While Cyprus accounts for less than half a percent of the 17-nation euro area’s economy, investors are concerned a shock from the country could aggravate Europe’s debt crisis.

“You still don’t have a deal in Cyprus, and as long as you don’t have a deal, there’s the question of uncertainty,” Scott MacDonald, head of research at MC Asset Management Holdings LLC in Stamford, Connecticut, said in a telephone interview.

Housing Starts

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.

Builders broke ground on 917,000 homes at an annual rate in February, up 0.8 percent from a revised 910,000 pace in January that was higher than initially estimated, the Commerce Department reported today in Washington. Building permits, a proxy for future construction, advanced 4.6 percent to 946,000, the strongest since June 2008. A firming economy may alleviate concern that companies will struggle to repay debt.

Capital One Financial Corp. (COF), the lender that gets more than half its revenue from credit cards, sold $850 million of bonds today in a two-part offering. The company sold $250 million of three-year, floating-rate notes to yield 45 basis points more than the three-month London interbank offered rate and $600 million of 1.5 percent debt due March 2018 at a spread of 82 basis points more than similar-maturity Treasuries.

Supervalu Swaps

Capital One’s $1.3 billion of 6.75 percent notes due September 2017 traded at 121.1 cents on the dollar to yield 1.83 percent on March 13, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The risk premium on the Markit CDX North American High Yield Index rose 4.9 basis points to 402.8 basis points, Bloomberg prices show.

The cost to protect the debt of Supervalu Inc. (SVU), the third- largest U.S. grocery chain, fell as an investor group said a tender offer for as much as 30 percent of the company’s shares at $4 wouldn’t be extended beyond its expiration time.

Five-year credit-default swaps on the Eden Prairie, Minnesota-based company dropped 29.8 basis points to 595.6 basis points as of 4:05 p.m., Bloomberg data show.

About 7.9 percent of Supervalu’s outstanding shares were tendered as of 5 p.m. yesterday in New York, according to a statement from Symphony Investors LLC, an investor group led by Cerberus Capital Management LP. The results are mostly “positive because it shows the shareholders think it’s worth more than $4,” Damian Witkowski, an analyst with Gabelli & Co., said in a telephone interview. Shares of Supervalu fell 3.9 percent to $4.22 in New York.

Liquidity Stress

Moody’s Investors Service’s Liquidity-Stress Index, which typically rises when corporations’ ability to manage cash needs deteriorates, increased to 3.5 percent in the first half of March from a record low last month, analysts led by John Puchalla wrote in a report yesterday.

Liquidity shouldn’t be a problem for speculative-grade borrowers amid good refinancing conditions, the rating company said in the release. The index suggests that the default rate among junk-rated companies will end the year at 2.5 percent.

The average relative yield on speculative-grade debt added 2.2 basis points to 494 basis points, Bloomberg data show. High- yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s.

To contact the reporter on this story: Victoria Stilwell in New York at vstilwell1@bloomberg.net

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

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