U.S. Company Credit Swaps Advance After Two Explosions in Boston

A gauge of U.S. corporate credit risk increased after two bombs exploded near the finish line of the Boston Marathon and as China’s economy lost momentum in the first quarter.

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 3.4 basis points to a mid-price of 85.4 basis points at 5:02 p.m. in New York, according to prices compiled by Bloomberg. The gauge climbed the most since traders started moving positions into Series 20 of the index on March 20 and is poised for its highest close since April 8.

Powerful blasts in Boston killed two and injured scores at the running event, according to police and hospital officials. The measure had been increasing earlier in the day, after China’s gross domestic product rose 7.7 percent from a year earlier, the National Bureau of Statistics said in Beijing today. That compared with the 8 percent median forecast in a Bloomberg survey of economists and 7.9 percent growth in the fourth quarter.

“China’s slow growth caught people off guard today and so this market had been weak all session long,” Ronald Quigley, head of fixed-income syndicate and primary sales at Mischler Financial Group Inc. in Stamford, Connecticut, said in a telephone interview. “But when you have an event like what took place at 3 p.m. today, that really does spook the markets.”

Credit swaps typically rise as investor confidence deteriorates and fall as it improves. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.

China GDP

“China is a factor in the back of everyone’s minds and does influence thinking,” Edward Marrinan, a macro credit strategist at Stamford-based RBS Securities, said in a telephone interview. “It’s natural that investors might want to back off and reassess where the markets might go from here.”

Credit swaps tied to the debt of J.C. Penney Co. rose after the retailer said it drew $850 million from its $1.85 billion revolving credit line as it works to raise capital.

Five-year contracts on J.C. Penney rose 1.1 percentage point to 15.1 percent upfront at 4:11 p.m. in New York, according to CMA, the data provider owned by McGraw-Hill Cos. that compiles prices quoted by dealers. That means it would cost $1.5 million initially and $500,000 annually to protect $10 million of obligations.

Credit Line

Proceeds from the credit facility will be used to fund capital spending and replenish inventory, J.C. Penney said in a statement today, as the department-store chain opens newly renovated home departments next month. The move would subordinate existing bonds and increase the company’s debt relative to earnings, Gimme Credit LLC analyst Carol Levenson wrote in a note today.

“This is more cash than we thought Penney might need to get through the year and also a bit sooner than we thought it might need it,” Levenson said in the note. “It’s good that the company has the flexibility to do this, but it also demonstrates that the ‘internally financed transformation’ envisioned by previous management was a pipe dream.”

J.C. Penney is evaluating a range of options to raise at least $1 billion, including selling a stake to a private-equity firm, and has hired Blackstone Group LP to help it with the process, people familiar with the matter said last week.


J.C. Penney ousted Chief Executive Ron Johnson on April 8 after a dismal first year on the job and reinstated his predecessor, Myron E. Ullman III. Sales in the year ended Feb. 2 plunged 25 percent to $13 billion, the lowest since at least 1987.

Tapping the credit line is a “stop-gap measure before permanent financing is put in place,” Fitch Ratings said in a statement today, adding that additional funding will be needed to cover a projected free cash flow shortfall of $1.3 billion to $1.5 billion this year. Fitch lowered its grade on the company to B- on Feb. 28 and said the draw on the facility has no immediate impact on the credit.

The risk premium on the Markit CDX North American High Yield Index increased by 15.2 basis points to 414.5 basis points, Bloomberg prices show.

The average relative yield on speculative-grade, or junk-rated, debt tightened 1.5 basis points to 523.6 basis points, Bloomberg data show. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and less than BBB- at S&P.

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