Caterpillar Swaps Rise as Mining Slump Weighs on Profit Outlook

The cost to protect against a default on bonds issued by Caterpillar Inc. (CAT)’s finance unit rose as the equipment maker cut its 2013 profit forecast amid a weakened outlook for mining demand.

Five-year credit-default swaps linked to Caterpillar Financial Services Corp. added 1.9 basis points to a mid-price of 80.8 basis points at 4:01 p.m. in New York, according to prices compiled by Bloomberg. That means investors are paying the equivalent of $80,800 annually to protect $10 million of debt from losses for five years.

Caterpillar’s profit for the year will be about $7 a share, compared with a January projection of $7 to $9, Peoria, Illinois-based Caterpillar said today in a statement. Sales will be $57 billion to $61 billion, compared with an earlier forecast of $60 billion to $68 billion.

“Mining customers have been lowering their capital expenditure expectations for 2013, and order levels have been very weak since the middle of 2012,” Michael DeWalt, a spokesman for Caterpillar, said in a first-quarter earnings call with analysts and investors. “Our long-term view of mining remains, I think, very good.”

Shares of Caterpillar climbed 2.8 percent to $82.71 in New York, the biggest jump since Jan. 2, as the company said it will resume its stock buyback program and sees increased output in China in the second quarter.

Company Earnings

The Markit CDX North American Investment Grade Index, a swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, decreased 1.7 basis points to a mid-price of 82 basis points at 4:11 p.m. in New York, Bloomberg prices show.

The 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.

Eight firms in the Standard & Poor’s 500 index post results today, part of the 169 earnings releases expected this week, according to data compiled by Bloomberg. Of the 110 that have reported so far, 72 percent have exceeded analysts’ predictions for earnings, data compiled by Bloomberg show.

“It’s kind of a crucial time because we had this fairly decent rally,” Marc Pinto, head of corporate bond strategy at New York-based Susquehanna International Group LLP, said in a telephone interview. “Investors are going to want to see if earnings can confirm the conviction we had leading up to the season.”

Home Sales

The risk premium on the Markit CDX North American High Yield Index declined 7.6 basis points to 399.5 basis points, Bloomberg prices show.

Purchases of previously owned homes unexpectedly decreased to a 4.92 million annualized rate, figures from the National Association of Realtors showed today in Washington, while the median forecast of 75 analysts surveyed by Bloomberg projected an increase to a rate of 5 million. Investors use housing data, including a report on new home sales tomorrow, to help gauge U.S. economic health and companies’ abilities to repay debt.

“You may not see a lot of action off the number today, but once you get new home sales numbers, investors will have two data points, and we may see a more defined direction in the market,” Pinto said.

The average relative yield on speculative-grade, or junk- rated, debt widened 0.1 basis point to 537.4 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and less than BBB- at S&P.

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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