Credit Swaps in U.S. Fall; Caesars Prepares $1.85 Billion Sale
A gauge of U.S. company credit risk fell as Caesars Entertainment Corp. (CZR) prepared to sell $1.85 billion of bonds, adding to about $161 billion of dollar-denominated issuance this month that is already more than double that of August.
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, decreased 1.6 basis points to a mid-price of 78.9 basis points as of 4:11 p.m. in New York, according to prices compiled by Bloomberg.
Confidence that borrowers will be able to repay their debt is building with issuance up from $68.8 billion last month and approaching the record $177.3 billion last September, according to data compiled by Bloomberg. The Federal Reserve’s decision last week to refrain from cutting back on $85 billion in monthly stimulus is encouraging issuers as yields on the Bank of America Merrill Lynch U.S. Corporate & High Yield Index decline to 4.09 percent from a 14-month high of 4.37 percent on Sept. 5.
“A lot of deals were pushed forward because of the drop in rates, so most of the deals that were supposed to be coming out within the month are coming out now within the week,” Rajeev Sharma, who manages $1.5 billion of fixed-income assets in New York at First Investors Management Co., said in a telephone interview. “This adds to investor confidence in the credit markets.”
The CDS measure typically falls as investor confidence improves and rises as it deteriorates. Credit swaps 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.
Underwriters for the Caesars sale are meeting with potential investors in New York tomorrow to discuss the two-part offering, according to a person with knowledge of the deal, who asked not to be identified because terms aren’t set.
The sale consists of $500 million of first lien, seven-year senior secured notes and $1.35 billion of second lien, eight-year senior secured notes, according to a filing with the U.S. Securities and Exchange Commission.
Caesars, the largest owner of U.S. casinos, will use the proceeds, along with borrowings under senior secured credit lines, to pay back outstanding loans under commercial mortgage-backed securities financing and existing credit facilities, according to a Sept. 18 filing.
The risk premium on the Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds, fell 2 basis points to 351.4, Bloomberg prices show.
The average extra yield investors demand to hold dollar-denominated, investment-grade corporate bonds rather than similar-maturity Treasuries widened 0.4 basis point to 130.9 basis points, Bloomberg data show. The measure for speculative-grade, or junk-rated, debt rose 7 basis points to 660.8.
Investment-grade debt is rated Baa3 or higher at Moody’s Investors Service and at least BBB- by Standard & Poor’s.
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