Credit Swaps in U.S. Rise as Traders Shift to New Index Series

Sept. 20 (Bloomberg) -- A gauge of U.S. company credit risk rose as banks, hedge funds and other money managers moved trades into a new version of the credit-default swaps index. The cost to protect the debt of Darden Restaurants Inc. increased.

Series 21 of 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, traded at 79.8 basis points as of 4:22 p.m. in New York, 10 basis points higher than where Series 20 ended yesterday, according to prices compiled by Bloomberg.

New versions of Markit Group Ltd.’s indexes are created every six months. Companies in the measure are replaced if they no longer hold appropriate grades, aren’t among the most actively traded borrowers or fail to meet other criteria. The new version was forecast to trade about 10 basis points wider due to the six-month extension in maturity, Morgan Stanley analysts led by Ashley Musfeldt wrote in a note Sept. 18.

“In comparing the names added and removed, we see very little difference in credit quality, sector composition and spread differential, leading to a negligible change from one index to the next,” the note said.

Assured Guaranty Municipal Corp., Weatherford International Ltd. and Avon Products Inc. were added to the index and SLM Corp., H.J. Heinz Co. and Dell Inc. were removed.

The measure 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.

Darden Risk

Darden’s credit risk rose to the most since April after the Orlando, Florida-based restaurant operator missed first-quarter earnings projections.

Five-year swaps tied to the debt of Darden climbed 27 basis points to 201 basis points as of 4:18 p.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market.

Profit excluding some items in the quarter ended Aug. 25 was about 53 cents a share, trailing an average of 70 cents from 29 analysts’ estimates compiled by Bloomberg.

Nielsen Holdings NV sold $625 million of 5.5 percent, eight-year senior notes today that yield 314 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg. The securities were rated B2 by Moody’s Investors Service, according to the ratings company.

Nielsen Sale

The consumer information company may use proceeds from the sale for general corporate purposes and debt repayment, according to a person with knowledge of the offering who asked not to be identified citing lack of authorization to speak publicly.

The risk premium on the Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds, rose 4.2 basis points to 350.3, Bloomberg prices show.

The average extra yield investors demand to hold dollar-denominated, investment-grade corporate bonds rather than similar-maturity Treasuries widened 1.7 basis points to 129.9 basis points, Bloomberg data show. The measure for speculative-grade, or junk-rated, debt rose 3.9 basis points to 655.4.

Investment-grade debt is rated Baa3 or higher at Moody’s and at least BBB- by S&P.

To contact the reporter on this story: Callie Bost in New York at cbost2@bloomberg.net

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