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Credit Swaps in U.S. Rise From Six-Year Low; Safeway Risk Climbs

Oct. 23 (Bloomberg) -- A gauge of U.S. company credit risk climbed from a six-year low as U.S. house prices rose less than economists estimated. The cost to protect the debt of Safeway Inc. increased.

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, added 1.8 basis points to 72 basis points at 5:05 p.m. in New York, according to prices compiled by Bloomberg. The index ended yesterday at the lowest level since November 2007 in data that adjust for the effects of the market’s shift to a new version of the index in September.

The measure increased after the Federal Housing Finance Agency reported house prices climbed 0.3 percent in August from July, missing the 0.8 percent average estimate of 15 economists surveyed by Bloomberg. A softening of the homes market would constrain economic growth, making it harder for companies to repay their debts.

“We are bouncing off the recent tights in the index, so one would expect a bit of backup here,” Michael Kraft, a senior money manager at Vanderbilt Avenue Asset Management in New York, wrote in an e-mail.

The swaps index typically climbs 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.

Safeway Risk

Credit risk for Safeway reached an eight-month high amid speculation that the grocer is reviewing buyout options from multiple firms with Goldman Sachs Group Inc. The Pleasanton, California-based company said Oct. 10 that it would discontinue operating its 72 Dominick’s stores in Chicago.

Five-year swaps tied to the debt of Safeway increased 59 basis points to 257 basis points at 4:30 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. That’s the highest level for the swaps since Feb. 21.

Gaming and Leisure Properties Inc., an entertainment company planning to spin off from Penn National Gaming Inc., sold $2.05 billion in senior notes today, according to data compiled by Bloomberg.

High Yield

The offering includes $550 million of 4.375 percent, five-year bonds that yield 307 basis points more than similar-maturity Treasuries, $1 billion of 4.875 percent, seven-year notes that yield 297 basis points more than benchmarks and $500 million of 5.375 percent, 10-year debentures at a 286 basis-point spread, Bloomberg data show.

The risk premium on the Markit CDX North American High Yield Index, a credit-swaps benchmark tied to speculative-grade bonds, rose 6.4 basis points to 346.8 basis points, Bloomberg prices show.

The average extra yield investors demand to hold dollar-denominated, investment-grade corporate bonds rather than similar-maturity Treasuries was little changed at 125.3 basis points, Bloomberg data show. The measure for speculative-grade, or junk-rated, debt rose 10 basis points to 663.5.

Investment-grade debt is rated Baa3 or higher at Moody’s Investors Service and at least BBB- by Standard & Poor’s.

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

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