Credit Swaps in U.S. Rise as Shutdown Looms; Caesars Risk Jumps

A gauge of U.S. company credit risk rose for the fourth day as the U.S. government heads toward its first partial shutdown in 17 years. The cost to protect the debt of Caesars Entertainment Corp. (CZR) climbed.

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 0.9 basis point to a mid-price of 82 basis points as of 4:04 p.m. in New York, according to prices compiled by Bloomberg.

Issuers are deferring sales this week amid uncertainty how credit markets will react to a government shutdown if Congress fails to pass a stopgap spending bill before funding for the federal budget expires tonight. Investors are concerned that riskier assets such as company bonds may suffer in the event of a closure.

“This government shutdown has been looming, so issuers have been anticipating that potential problem this week,” Marc Pinto, head of corporate bond strategy at Susquehanna International Group LLP, said in a telephone interview. “It could be this way for a while if a shutdown does occur and remains in place.”

If Congress doesn’t pass the spending bill by tonight, 800,000 federal workers may be sent home on unpaid furloughs. A closedown might slow economic growth by as much as 1.4 percentage points, according to economists. A deceleration of economic activity makes it more difficult for companies to repay their debt obligations.

Caesars Swaps

The index typically climbs as investor confidence deteriorates and falls as it improves. 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.

Credit risk for Caesars rose after the a property unit of the casino operator issued $1 billion in seven-year notes and $1.15 billion in eight-year notes on Sept. 27, according to a filing with the U.S. Securities and Exchange Commission.

Swaps tied to the debt of Las Vegas-based Caesars climbed 1.3 percentage points to a mid-price of 55.5 percent upfront, according to data provider CMA, which is owned by McGraw-Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market. That means the cost to protect $10 million of the company’s debt from default rose to $5.55 million initially in addition to $500,000 annually.

High Yield

The Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds rose 1.8 basis points to 399.1 basis points, Bloomberg prices show. Series 21 of the index, which began trading Sept. 27, closed at 397.3 basis points, 44.4 basis points higher than Series 20’s close on Sept. 26.

The average extra yield investors demand to hold dollar-denominated, investment-grade corporate bonds rather than similar-maturity Treasuries widened 2.2 basis points to 134.1 basis points, Bloomberg data show.

Investment-grade debt is rated Baa3 or higher at Moody’s Investors Service and at least BBB- by Standard & Poor’s.

To contact the reporter on this story: Callie Bost in New York at cbost2@bloomberg.net

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

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