U.S. Credit Swaps Rise; Corrections Corp. Plans to Issue Bonds

A gauge of U.S. corporate credit risk rose as Cyprus officials worked on a new bailout plan and initial jobless claims increased.

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 1.7 basis points to a mid-price of 91 basis points at 4:16 p.m. in New York, according to prices compiled by Bloomberg. Traders moved into a new version of the measure, Series 20, yesterday.

Euro-area finance ministers expect Cyprus to submit a new rescue proposal quickly, saying in a statement that the Eurogroup stands ready to discuss a plan with lawmakers from the region’s third-smallest economy after they rejected a bank deposit levy aimed at mitigating the cost of a bailout package. In the U.S., Americans filed 336,000 first-time claims for unemployment insurance last week, 4,000 fewer than the estimate by economists, and sales of previously owned homes rose in February to the highest level in more than three years.

“We have an economic recovery going on, but it’s very tepid,” Robert Grimm, head of corporate trading at Odeon Capital Group LLC, said in a telephone interview from Greenwich, Connecticut. “We can’t afford any disruptions, and if this Cyprus thing blows up in Europe, it’s a disruption that’s going to hurt us.”

Heinz CDS

Standard & Poor’s cut Cyprus’s credit rating one level to CCC, four steps above default, and said it would probably lower the rating further if the nation’s “government fails to obtain a financing program soon.”

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.

The cost to protect the debt of H.J. Heinz Co. (HNZ) dropped as the ketchup maker, which is being acquired by Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) and 3G Capital Inc. canceled plans to distribute $2 billion of the $12 billion in loans backing the purchase in euros and pounds, according to a person with knowledge of the deal.

Five-year credit-default swaps on Heinz fell 9.7 basis points to 175 basis points, according to Bloomberg prices. The Pittsburgh, Pennsylvania-based company may fund the portion with bonds or dollar-denominated loans, said the person, who requested not to be identified because the information isn’t public.

Corrections Offering

Corrections Corp. of America, the largest U.S. private prison operator, plans to sell $675 million of senior notes in two parts to fund a tender offer for outstanding debt, according to a filing. The Nashville, Tennessee-based company intends to issue securities due 2020 and 2023, with proceeds used to redeem its $465 million of 7.75 percent bonds due June 2017, or to fund payments linked to its conversion into a real estate investment trust, the filing stated.

CCA (CXW) is also seeking to boost its revolving credit facility to $900 million, as well as to get consent from bondholders to amend rules governing the debt that “would eliminate substantially all of the restrictive covenants and certain events of default provisions in the indenture,” according to the filing.

The risk premium on the Markit CDX North American High Yield Index added 8.6 basis points to 402.9 basis points, its biggest jump since Feb. 25, Bloomberg prices show.

Strong Issuance

Gradual economic growth and accommodating credit markets have improved the quality of speculative-grade companies, according to a March 20 report from Moody’s Investors Service analysts led by David Keisman.

The number of U.S. non-financial companies on Moody’s B3 Negative and Lower corporate ratings list fell to 146 in March from 176 a year before, the report stated. Strong high-yield issuance “remains the engine as investors readily lend to riskier companies in pursuit of higher yields,” Keisman wrote.

The average relative yield on speculative-grade, or junk- rated, debt rose 2.4 basis points to 494.9 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s 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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