Credit Swaps in U.S. Drop for Fourth Day; Hyatt Issues Bonds
A gauge of U.S. corporate credit risk fell for a fourth straight day as investors speculated company profits are strong enough to prevent default rates from rising.
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 1.7 basis points to a mid-price of 68.9 basis points at 4:11 p.m. in New York, according to prices compiled by Bloomberg.
The measure is at its lowest level since November 2007, as about 72 percent of companies in the Standard & Poor’s 500 Index (SPX) that have posted earnings since April 8 exceeded profit projections, data compiled by Bloomberg show. The results are buoying investor confidence that company default rates will hold below historical averages.
“Corporate credit has the advantages of strong balance sheets,” Michael Kraft, a money manager at Vanderbilt Avenue Asset Management LLC in New York, said in a telephone interview. “You’ve still got very healthy U.S. companies and multinationals. The jury’s still out on whether this is a temporary euphoria or a permanent return to tighter levels.”
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 speculative-grade default rate in the U.S. fell to 2.9 percent in the first quarter from 3.4 percent the previous quarter, Moody’s Investors Service said April 8. The New York- based ratings company said it expects the figure to fall to 2.6 percent by year-end.
Hyatt Hotels Corp. (H), the lodging chain controlled by the Pritzker family, issued bonds to help pay down debt in its first sale since 2011.
The company sold $350 million of 3.375 percent senior notes due July 2023 to yield 165 basis points more than similar- maturity Treasuries, according data compiled by Bloomberg. Proceeds will be used to redeem $250 million of 5.75 percent bonds due August 2015 and to fund a tender offer for $250 million of 6.875 percent securities due August 2019, Chicago- based Hyatt said in a regulatory filing. Any remaining proceeds will be used for general corporate purposes.
The new bonds are rated Baa2 by Moody’s, the credit grader said in a statement today.
The risk premium on the Markit CDX North American High Yield Index declined 4 basis points to 337.2 basis points, Bloomberg prices show. The measure is the lowest since September 2007, according to data provider CMA, which is owned by McGraw Hill Financial and compiles prices quoted by dealers in the privately negotiated market.
The cost to protect against a default by Frontier Communications Corp. (FTR) dropped as the phone, Internet and television provider booked more broadband subscribers and posted higher residential and business revenue per customer in its first quarter.
Five-year credit swaps tied to Frontier declined 25.9 basis points to a mid-price of 348.3 basis points as of 5:01 p.m., Bloomberg prices show. That means it would cost the equivalent of $348,300 annually to protect $10 million of obligations for five years. The contracts are trading at their lowest level since July 2011 after falling for 13 straight days.
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