U.S. Corporate Credit Swaps Climb as Business Activity Shrinks

A gauge of U.S. corporate credit risk rose for the first time in three days as reports showed that economic growth is weakening.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 0.6 basis point to a mid-price of 99.1 basis points at 4:25 p.m. in New York, according to prices compiled by Bloomberg. The index was updated last week, replacing companies that no longer had appropriate grades or whose contracts aren’t among the most actively traded. CDS tied to Gap Inc. reached a three-week high.

The measure increased as business activity in the U.S. unexpectedly contracted in September for the first time in three years, according to the Institute for Supply Management-Chicago Inc., stoking concern that the downturn may impair companies’ ability to repay debt. The Thomson Reuters/University of Michigan index of consumer sentiment rose to 78.3 this month from 74.3 in August, short of the 79 median estimate of economists in a Bloomberg survey.

Yields on company debt have fallen so low that investors end up in a “lose-lose situation,” Robert Grimm, head of high-yield trading at Odeon Capital Group LLC in Greenwich, Connecticut, said in a telephone interview. “If the world gets better then interest rates go up, and if the world gets worse then credit gets worse.”

New Issues

The credit swaps index typically increases as investor sentiment deteriorates and falls 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.

NBCUniversal Media LLC, a Comcast Corp.-owned company based in New York, sold $2 billion of 10- and 30-year notes, according to a person familiar with the deal. The bonds, which will be used to increase working capital and for general corporate purposes, may be rated two levels above junk at Baa2 by Moody’s Investors Service and the third-lowest investment grade at BBB+ by Standard & Poor’s, said the person, who asked not to be identified because terms aren’t set.

Alpha Natural Resources Inc., the coal producer that will be taken out of from the S&P 500 Index Oct. 1 because its market value is too low, sold $500 million of 9.75 percent, 5.5-year notes, according to data compiled by Bloomberg. The company will use the proceeds to finance a tender offer to buy back as much as $350 million of convertible debt, according to a person familiar with the offering, who asked not to be identified because they were not authorized to speak about the transaction.

Relative Yield

The average relative yield on speculative-grade debt widened by 1 basis point, led by the bonds of utility and consumer cyclical companies, which increased 3 basis points, Bloomberg data show.

Credit swaps tied to Gap rose 7 basis points to 142.5 at 3:30 p.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. The San Francisco-based company’s contracts are the highest since Sept. 6, when they traded at 147.5.

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