U.S. Credit Swaps Decline; Home Depot Sells $2 Billion of Bonds

A gauge of U.S. corporate credit risk dropped to a two-week low as factory orders in the world’s biggest economy increased in February.

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, fell 2.2 basis points to a mid-price of 87.8 basis points at 4:10 p.m. in New York, according to prices compiled by Bloomberg. That’s poised for the lowest closing level since traders started moving positions into a new series of the index on March 20.

Orders placed with U.S. factories increased by 3 percent in February, a Commerce Department report showed today in Washington, beating the 2.9 percent median rise forecast from 64 economists surveyed by Bloomberg. The gain is the biggest since September’s 4.5 percent jump and compares with a revised 1 percent decline in January. Signs of improvement in the economy may boost investor confidence about companies’ ability to repay debt.

“Factory orders are a little better than expected, and the perception of risk is certainly reduced out here,” Mitchell Stapley, chief investment officer of Fifth Third Asset Management, said in a telephone interview from Grand Rapids, Michigan.

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.

Share Repurchases

Home Depot Inc., the largest U.S. home-improvement retailer, sold $2 billion of bonds in a two-part offering to help fund share repurchases.

The Atlanta-based company, which boosted its dividend and announced a $17 billion stock buyback on Feb. 26, issued $1 billion of 2.7 percent securities due 2023 that yield 85 basis points more than similar-maturity Treasuries and an equal amount of 4.2 percent, 30-year debt with a spread of 110 basis points, according to data compiled by Bloomberg. Proceeds will be used for general corporate purposes including share repurchases, Home Depot said today in a regulatory filing.

The company’s $1 billion of 5.95 percent bonds due 2041 traded March 26 at 127 cents on the dollar to yield 4.29 percent, or 112 basis points more than similar-maturity Treasuries, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Hertz Swaps

The risk premium on the Markit CDX North American High Yield Index dropped 4.9 basis points to 423.7 basis points, Bloomberg prices show.

The cost to protect the debt against default of a Hertz Global Holdings Inc. unit fell as the largest publicly traded U.S. auto-rental chain forecast 2015 adjusted earnings that surpassed analysts’ estimates.

Five-year credit-default swaps on Hertz Corp. declined 3.9 basis points to 261.1 basis points, Bloomberg prices show. That’s the biggest drop since March 15.

Hertz projected 2015 adjusted per-share earnings of $3.10 to $3.30 in a presentation for its investor meeting, above the average $2.39 expected by three analysts.

The average relative yield on speculative-grade, or junk-rated, debt narrowed 2 basis points to 500.9 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.

‘Solid Demand’

The Moody’s liquidity-stress index, which typically rises when corporations’ ability to manage cash needs appears to worsen, rose to 3.2 percent last month from a record low of 3 percent in February, analysts led by John Puchalla wrote in an April 1 report. The index reached a high of 20.9 percent in March 2009.

“Solid demand from fixed-income investors for both bonds and leveraged loans continues to drive market access for speculative-grade companies seeking to refinance or reprice their debt,” Puchalla wrote.

Through the end of March, U.S. high-yield issuance was 5.4 percent ahead of the pace at the same time last year, according to the report.

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