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U.S. Company Credit Swaps Decline; Valeant to Raise Debt

A gauge of U.S. corporate credit risk fell for the first time in six trading sessions as investors weighed whether the Federal Reserve will consider curbing its unprecedented stimulus efforts.

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, decreased 0.7 basis point to a mid-price of 76.2 basis points at 4:16 p.m. in New York, according to prices compiled by Bloomberg. The measure added 6.9 basis points in the six trading days through yesterday.

Investors are looking for signs of U.S. economic improvement to help them gauge when the Fed might start to reduce its $85 billion in monthly debt purchases, which have buoyed credit markets. Fed Chairman Ben S. Bernanke said last week the central bank may reduce the pace of bond buying if officials are confident that the recovery will be sustained, which has added volatility to the markets, said Greg Braca, head of U.S. corporate and specialty banking at TD Bank in New York.

“You can’t have it both ways,” Braca said in a telephone interview. “The Fed signaling that it may pull back a little bit is actually a really good sign that the economy is healing.”

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.

Economic Indicators

The U.S. economy grew at a 2.4 percent annualized rate in the first quarter, less than the 2.5 percent pace initially reported, the Commerce Department said today in Washington. Slower inventory building and cutbacks in government spending overshadowed the biggest gain in consumer purchases since the end of 2010.

Applications for jobless benefits increased 10,000 to 354,000 in the week ended May 25, Labor Department figures showed in Washington. Holiday closures prevented five states from completing a full count, and dismissals have been waning as employers hold on to workers to meet sales.

“Near-term economic data will be very important as markets weigh the impact of each release on future Fed activity,” Jon Duensing, head of corporate credit at Smith Breeden Associates in Boulder, Colorado, said in a telephone interview. “There’s an expectation that domestic economic growth will rebound during the second half.”

The risk premium on the Markit CDX North American High Yield Index fell 3 basis points to 373.2 basis points, Bloomberg prices show.

Valeant Acquisition

Valeant Pharmaceuticals International Inc. will finance its purchase of Bausch & Lomb Holdings Inc. with about $7.5 billion in debt.

Valeant, Canada’s largest drugmaker, will raise a $4.3 billion term loan and sell $3.225 billion in senior unsecured bonds, the company disclosed today in a regulatory filing. Valeant will also seek $1.75 billion in equity.

Proceeds will support the $8.7 billion acquisition and repay about $4.2 billion of Warburg Pincus LLC-owned Bausch & Lomb’s borrowings leaving leverage, a measure of debt to earnings, before taxes, depreciation and amortization, at 4.6 times, according to the filing.

The average relative yield on speculative-grade, or junk-rated, debt widened 3.9 basis points to 501.6 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s.

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