Credit Swaps in U.S. Rise on Signs European Crisis Is Deepening

A gauge of U.S. company debt risk rose for a second day on concern that rescue demands from regional governments in Spain will force the nation to seek a sovereign bailout.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark used to hedge against losses on corporate debt or to speculate on creditworthiness, increased 2.1 basis points to a mid-price of 113.4 basis points at 5:31 p.m. in New York, according to prices compiled by Bloomberg. The index is trading at the highest since July 9.

Investors are concerned that a deepening of Europe’s debt crisis will depress global markets and undermine companies’ ability to repay borrowings. Spanish 10-year bond yields climbed to a new euro-area record today after El Pais reported six regions may follow Valencia in seeking financial aid from the government. McDonald’s Corp., the world’s largest restaurant chain, reported second-quarter profit that trailed analysts’ projections as U.S. same-store sales slowed.

“Fears over Europe, and Spain in particular, combined with mediocre earnings reports, are driving credit spreads wider,” Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. in New York, said in an e-mail.

Greece Rescue

Greece will host a visit beginning tomorrow from the troika of international creditors -- the European Commission, the European Central Bank and the International Monetary Fund. The nation is struggling to meet obligations tied to the 240 billion euros of rescue funding it has received over the past two years as efforts to reduce its debt to 120 percent of gross domestic product by 2020 fall short.

Spain’s 10-year yield rose 23 basis points, or 0.23 percentage point, to 7.50 percent as of 5 p.m. in London after climbing to 7.565 percent, the highest since November 1996.

Credit swaps typically rise as investor confidence deteriorates and fall as it improves. 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.

Nexen Swaps

Swaps on Canada’s Nexen Inc. fell to the lowest in almost a year and its bonds surged after Cnooc Ltd. agreed to buy the oil producer for $15.1 billion in the biggest overseas purchase by a Chinese firm.

Nexen contracts declined 83.2 basis points to a mid-price of 143.8 basis points, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. That’s about the lowest since the contracts closed at 139 basis points on Aug. 4, according to data compiled by Bloomberg.

Cnooc, rated six levels higher than the Calgary-based company at Aa3 by Moody’s Investors Service, would gain assets in Canada, the U.K., West Africa and the Gulf of Mexico that may boost the Chinese company’s output by 20 percent. Nexen, which has about $3.9 billion of bonds outstanding, had a ratio of total debt to earnings of 1.11 last year, more than three times Cnooc’s leverage, Bloomberg data show.

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