U.S. Company Credit Swaps Fall as Housing Starts Increase

A gauge of U.S. corporate credit risk declined, almost erasing yesterday’s advance, as a report showed new-home construction rose last month.

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 3.3 basis points to a mid-price of 82 basis points at 4:42 p.m. in New York, according to prices compiled by Bloomberg. The gauge yesterday added 3.4 basis points, the most since March 20, the day traders started moving positions into a new version.

U.S. housing starts climbed 7 percent to a 1.04 million annual rate, the most since June 2008, after a revised 968,000 pace in February that was larger than previously reported, Commerce Department figures showed today in Washington. The median estimate of 80 economists surveyed by Bloomberg called for 930,000. Signs the U.S. economy is improving may alleviate investor concern that companies will struggle to repay debt.

“Investors are reasonably comfortable with their overall positioning,” Ashish Shah, the head of global credit investment at New York-based AllianceBernstein LP, which oversees $256 billion in fixed-income assets, said in a telephone interview. “We have headwinds, but the recovery in the U.S. will be reasonable through the course of the year.”

Record Income

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.

Wells Fargo & Co. and JPMorgan Chase & Co., the most profitable U.S. banks, are selling a combined $3.5 billion of debt and preferred stock after generating record income in the first quarter.

Wells Fargo issued $1.15 billion of five-year debt that pays 63 basis points more than the three-month London interbank offered rate and an additional $850 million of its 1.5 percent securities due January 2018 that yield 75 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg.

JPMorgan is planning to sell $1.5 billion of perpetual preferred stock to yield 5.15 percent, according to a person familiar with that transaction who asked not to be identified, citing lack of authorization to speak publicly.

Energy Future

The risk premium on the Markit CDX North American High Yield Index declined 17.6 basis points to 398.6 basis points, Bloomberg prices show, reversing yesterday’s 16.9 basis-point jump.

Credit swaps tied to the debt of Energy Future Holdings Corp. dropped after the power producer, taken private in 2007 in the largest leveraged buyout, proposed a pre-packaged bankruptcy that would put Texas Competitive Electric Holdings and some other units in Chapter 11.

Five-year contracts on Energy Future tightened 1.4 percentage points to 20.5 percent upfront at 4:15 p.m. in New York according to CMA, the data provider owned by McGraw-Hill Cos. that compiles prices quoted by dealers. That implies a 71.6 percent probability the company will fail to meet its obligations before the swaps expire June 2018, down from 73.6 percent yesterday, CMA data show.

Equity Stake

The company has been in confidential talks for a pre-packaged restructuring of about $32 billion in debt held by its Texas Competitive subsidiary, according to a filing yesterday. The initial proposal, rejected by creditors, asked them to forgive debt in exchange for equity in Dallas-based Energy Future and $5 billion in cash or new debt. KKR & Co. and TPG Capital LP, backers of the $48 billion takeover, and the other private-equity sponsors said they want to retain a 15 percent equity stake.

The fact that the sponsors and Texas Competitive creditors want equity supports the view that Energy Future’s stake in Oncor Electric Delivery Co., its regulated unit that owns Texas power lines, will not be sold and that there is “significant value from Oncor down the road,” CreditSights Inc. analyst Andy DeVries wrote in a note today.

The average relative yield on speculative-grade, or junk-rated, debt added 10.1 basis point to 534.1 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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