Rite Aid Credit Swaps Drop After First Annual Profit Since 2007

The cost to protect against a default by Rite Aid Corp. from default plunged after the drugstore chain reported its first annual profit since 2007 as it benefits from a focus on wellness programs.

Five-year credit-default swaps linked to Rite Aid fell 82.8 basis points to 475.1 basis points at 3:30 p.m. in New York, according to CMA, the data provider owned by McGraw-Hill Cos. that compiles prices quoted by dealers. That means investors are paying the equivalent of $475,100 annually to protect $10 million of debt from losses for five years.

Rite Aid reported net income of $118.1 million, or 12 cents a share, for the fiscal year ended March 2, compared with a loss of $368.6 million, or 43 cents, a year earlier, according to a statement today. The company last reported an annual profit of $26.8 million in its fiscal year 2007.

The chain seeks to be a “neighborhood destination for health and wellness,” Chief Executive Officer John Standley said in the release today. About 17 percent of the chain’s 4,623 locations have been turned into wellness centers with expanded pharmacy services and health-focused products.

Shares of Rite Aid surged 18 percent to $2.12 in New York, the highest price since September 2009. The company was the best performer today in the Russell 2000 Index.

A gauge of U.S. corporate credit risk held as Americans filed fewer applications for unemployment benefits last week amid seasonal adjustments.

Jobless Claims

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, narrowed 0.5 basis point to a mid-price of 81.5 basis points at 4:27 p.m. in New York, according to prices compiled by Bloomberg.

The measure fell for a sixth consecutive session and reached the lowest intraday level since March 19. New versions of Markit Group Ltd.’s indexes are created every six months, and traders started moving positions into Series 20 of the investment-grade gauge on March 20.

Jobless claims decreased by 42,000 to 346,000 in the week ended April 6, from a revised 388,000, Labor Department figures showed today in Washington. The median forecast of 49 economists surveyed by Bloomberg called for a drop to 360,000. Holidays such as Easter that fall on different weeks from year to year make it difficult to smooth out swings in the data, leading to increased volatility, the Labor Department said.

High Yield

“While our economy is doing better than most, it’s still not doing great,” Robert Grimm, head of corporate trading at Odeon Capital Group LLC, said in a telephone interview from Greenwich, Connecticut. “Credit spreads are holding in very tight because the stock market is OK. We’re in a market that just wants to go up, but it can’t forever.”

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 risk premium on the Markit CDX North American High Yield Index declined 4.8 basis points to 399.4, Bloomberg prices show.

The average relative yield on speculative-grade, or junk-rated, debt narrowed 2.2 basis point to 522.1 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.

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