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Chesapeake Energy Credit-Default Swaps Drop on Debt Repayment

The cost to protect Chesapeake Energy Corp.’s debt from default fell to the lowest in more than eight weeks after the second-biggest U.S. natural-gas producer said it plans to cut long-term debt 25 percent in two years.

The company will sell assets, cut back acquisition of new drilling leases and reduce production growth to 25 percent through the end of 2012 from a previous target of as much as 40 percent, Aubrey McClendon, chief executive officer of Oklahoma City-based Chesapeake, said in a statement today. No stock will be sold to buy debt, the company said.

“It’s a knee-jerk reaction to the CEO’s statement,” said Michael Kraft, senior portfolio manager at Crimson Capital Trading LLC in New York. “There’s a lot of interest around the name. Obviously there’s a lot of folks involved in it and you’re going to see a lot of volatility.”

The contracts fell 24.6 basis points to 335.2 basis points, according to data provider CMA. That’s down from 545.9 basis points in May.

Prices on Chesapeake’s bonds imply the debt is rated Ba2 as of Jan. 5, one step above its actual Ba3 rating, according to Moody’s Corp.’s capital markets research group. Exxon Mobil Corp. is the largest U.S. gas producer.

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.

Gap, Target Results

The cost of protecting company bonds from default in the U.S. climbed for a second day, as stocks fell and sales at Gap Inc., Target Corp. and other U.S. retailers fell short of analysts’ projections.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 3.7 basis points to a mid-price of 86.7 basis points, the biggest jump since Nov. 23, according to index administrator Markit Group Ltd. The index typically rises as investor confidence deteriorates and falls as it improves.

“Retail sales were OK but not as robust as we thought they were going to be,” said George Ashur, managing director of credit strategy at Societe Generale SA. “It’s a barometer of consumer activity. Forget sentiment. This is actually what the consumer did.”

Sales at stores open more than a year rose 3.2 percent in December, according to Retail Metrics Inc. That compared with the 3.5 percent average of estimates compiled by the firm and a 5.5 percent increase in November. The Standard & Poor’s 500 Index dropped 0.2 percent to 1,273.85.

Potential Declines

Credit-default swaps on San Francisco-based Gap’s debt climbed 3.5 basis points to 101.5, CMA data show. Contracts on Target, based in Minneapolis, fell 1.3 basis points to 44.6.

Investors bought the U.S. credit-swaps index to protect against potential declines in the S&P 500 Index, according to Michael Donelan, who oversees $4 billion of bonds at Ryan Labs Inc. in New York. They’re also buying the credit index amid record company bond issuance, he said. Issuers sold $9 billion of U.S. corporate bond sales today, bringing weekly issuance to an all-time record of $48.2 billion, according to data compiled by Bloomberg. The Markit index is “very liquid” and so is a good vehicle for protecting against stock declines, according to Donelan.

“It’s been a huge couple of days in issuance,” he said.

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