U.S. Credit Swaps Drop; Dollar General Sells Bonds in Two Parts

A gauge of U.S. corporate credit risk declined as Alcoa Inc.’s profit exceeded analysts’ estimates, marking the start of the earnings season.

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, declined 1.5 basis points to a mid-price of 85.4 basis points at 4:28 p.m. in New York, according to prices compiled by Bloomberg. The gauge is poised for its lowest close since traders started moving positions into a new series on March 20.

Alcoa, the first Dow Jones Industrial Average member to publish results each quarter, reported an 11 cents a share adjusted profit today, better than the 8-cent average of 18 analysts’ estimates compiled by Bloomberg. Investors may be influenced by earnings results that indicate whether companies will struggle to repay obligations.

“Looking ahead, earnings season will be very interesting to see if we’ll get any response in investment grade. We’ll get a test with Alcoa,” Noel Hebert, the chief investment officer at Concannon Wealth Management, which oversees about $250 million of assets, said in a telephone interview from Bethlehem, Pennsylvania. “High yield is a place where, if we get something really disappointing from someone, we could see a reaction.”

Overall first-quarter revenue for companies in the Standard & Poor’s 500 Index is forecast to be up 1 percent from the year before, according to a note from JPMorgan Chase & Co. analysts.

Dollar General

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.

Dollar General Corp., the discount retailer acquired by KKR & Co. in 2007, sold $1.3 billion in bonds and expects to raise $1.85 billion in loans to help refinance senior secured borrowings.

The company, based in Goodlettsville, Tennessee, sold $900 million of 3.25 percent, 10-year debt to yield 155 basis points more than similar-maturity Treasuries and $400 million of 1.875 percent, five-year notes with a relative yield of 120 basis points, data compiled by Bloomberg show. The bank debt is expected to consist of a $1 billion term loan and an $850 million cash flow-based revolving credit line, each due in five years, Dollar General said today in a statement distributed by Business Wire.

Default Rate

Proceeds from the term loan and the note sale will be used to pay off a senior secured credit pact and for general corporate purposes, according to the statement.

The risk premium on the Markit CDX North American High Yield Index dropped 8.7 basis points to 415.9 basis points in a third day of declines, Bloomberg prices show.

The trailing 12-month U.S. speculative-grade corporate default rate finished the first quarter at 2.9 percent, unchanged compared with a year ago and down from 3.4 percent on a sequential basis, according to a report today from Moody’s Investors Service.

The rate is expected to fall to 2.6 percent by the end of the year, the report said. Moody’s expects default rates to be highest in the U.S. media industry, which includes the advertising, printing and publishing sectors.

The dollar-weighted, speculative-grade bond default rate in the U.S. ended the first quarter at 1.3 percent, down from 1.5 percent a year ago and 1.7 percent in the previous period, according to the report.

The average relative yield on speculative-grade, or junk-rated, debt tightened 7.7 basis points to 528.8 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s and less than BBB- at S&P.