April 11 (Bloomberg) -- Credit-default swaps on Community Health Systems Inc. and Tenet Healthcare Corp. soared after Tenet sued the hospital operator for allegedly overbilling Medicare.
Contracts protecting the debt of Franklin, Tennessee-based Community Health jumped 159.5 basis points to 612.6 basis points, according to data provider CMA. The contracts cost 4.5 percent upfront, meaning investors would pay $450,000 initially and $500,000 annually to protect $10 million of the company’s debt. Swaps on Tenet climbed 71.9 basis points to 529.2.
Tenet, which rejected an unsolicited bid in November from Community Health, seeks to force the company to disclose how it admits patients to hospitals for “financial rather than clinical purposes,” according to a Securities and Exchange Commission filing today. Tenet filed the lawsuit in U.S. District Court in Dallas.
“It introduces uncertainty,” said Stephen Antczak, head of U.S. credit strategy at Societe Generale SA in New York. “Whether there is more regulatory scrutiny or not, this certainly increases, relative to what it was in the past, the possibility of more.”
Swaps on other health care-related companies rose, with contracts on HCA Holdings Inc., which operates hospitals in the U.S. and U.K., gaining 28.5 basis points to 388.5. Those on Universal Health Services Inc. jumped 17 basis points to 191, the data show.
Tomi Galin, a spokeswoman for Franklin, Tennessee-based Community Health, didn’t immediately return a call seeking comment.
Level 3, Tyco
Contracts on Level 3 Communications Inc. dropped after the unprofitable provider of broadband services agreed to buy Global Crossing Ltd. for about $1.9 billion to expand its network and reduce expenses. They fell 5.8 percentage points to 4.8 percent upfront, CMA data show.
“This is what telecom has needed for a long time,” said Donna Jaegers, an analyst at DA Davidson & Co. who recommends buying both stocks. “You have way too many players.”
Swaps on Tyco International Ltd. declined 3 basis points to 47.5. Schneider Electric SA is weighing a takeover offer for Tyco that would make the French company the world’s biggest maker of security systems, according to three people with knowledge of the matter.
The cost of protecting corporate bonds from default in the U.S. was little changed as earnings season began today with Alcoa Inc.
The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 0.1 basis point to a mid-price of 93.7 basis points as of 4:34 p.m. in New York, according to index administrator Markit Group Ltd.
Alcoa, the largest U.S. aluminum producer, reported first-quarter profit that beat analysts’ estimates by one cent after the company’s realized prices for the lightweight metal increased. The credit swaps index typically rises 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.
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