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U.S. Company Credit Swaps Decline While McGraw-Hill Rises

Feb. 5 (Bloomberg) -- A gauge of U.S. corporate credit risk fell after service industries showed resilience in January, allaying investors’ concern that economic growth will slow down.

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, dropped 1.8 basis points to a mid-price of 88.5 basis points at 4:45 p.m. in New York, according to prices compiled by Bloomberg. The index rose 4.1 basis points yesterday, the most since Dec. 28.

An expanding services segment, which is the biggest part of the economy, may ease concern that companies’ ability to repay debt will be hampered. The Institute for Supply Management’s non-manufacturing index cooled to 55.2 last month from 55.7 in December, which was the highest level in 10 months, the Tempe, Arizona-based group said today. A gauge of services employment reached a seven-year high.

“The ISM numbers are decent, the economy is expanding, showing that things are slowly improving and the index is reflecting the strength,” Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan, said in a telephone interview.

The housing market and increased construction spending also are big drivers of the economy, Mikelic said. Spending on all construction projects rose 0.9 percent in December to an $885 billion annual rate, the fastest since August 2009, Commerce Department figures showed on Feb. 1.

McGraw-Hill Risk

The credit-swaps index typically falls as investor confidence improves and rises as it deteriorates. 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.

The cost to protect McGraw-Hill Cos. debt from losses increased after the company and its Standard & Poor’s credit-ratings unit were sued by the U.S. over claims it understated the credit risk of bonds and derivatives that were central to the financial crisis.

Five-year credit-default swaps on the company’s debt increased 25 basis points to 142 basis points as of 3:18 p.m. in New York, according to data provider CMA, which is owned by McGraw-Hill and compiles prices quoted by dealers in the privately negotiated market.

The risk premium on the Markit CDX North American High Yield Index dropped 8.3 basis points to 444.7 basis points, Bloomberg prices show. The high-yield index gauges the risk of companies with credit ratings below investment grade.

IBM Offering

International Business Machines Corp. raised $2 billion in a two-part bond offering that included floating-rate debt yielding less than the benchmark interest rate for more than $300 trillion of financial products.

The largest computer-services provider issued equal $1 billion portions of notes due 2015 that pay 2 basis points less than the London interbank offered rate and 1.25 percent securities maturing 2018 that yield 47 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg.

Five-year credit-default swaps protecting IBM’s debt rose 1 basis point to 35.5 basis points as of 4:46 p.m. in New York, according to CMA prices.

The average relative yield on speculative-grade or junk-rated debt rose 1.5 basis points to 486 basis points, according to Bloomberg data.

High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- at S&P. A basis point is 0.01 percentage point.

To contact the reporter on this story: Madhura Karnik in New York at mkarnik@bloomberg.net

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

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