U.S. Company Credit Risk Surges

Cost to protect debt of U.S. companies hits highest level in more than a year.

The cost to protect the debt of U.S. companies surged to the highest level in more than a year on concern that the European sovereign crisis is worsening.

The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 5.8 basis points to a mid-price of 115.8 basis points as of 5:09 p.m. in New York, according to index administrator Markit Group Ltd. That’s the highest level since July 2010.

Investor confidence in corporate debt deteriorated as central banks struggle to prevent a recession, with Federal Reserve Chairman Ben S. Bernanke vowing yesterday to keep borrowing costs at an all-time low through mid-2013 to revive a recovery that’s “considerably slower” than expected.

While the European Central Bank bought Italian and Spanish bonds to help reduce borrowing costs, the cost to insure French government debt against default climbed to a record 174.5 basis points. France’s top credit grade was affirmed by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings amid concern that Europe’s sovereign debt crisis is intensifying.

The index of high-grade corporate debt, which typically falls when investor confidence improves and rises when it deteriorates, increased 12.1 basis points on Aug. 8 in its biggest gain since June 2010 following S&P’s Aug. 5 downgrade of the U.S. debt rating.

Credit-default swaps on Charlotte, North Carolina-based Bank of America Corp. added 26 basis points to 304 basis points, according to data provider CMA.

Contracts on New York-based Citigroup Inc. climbed by 8.9 basis points to 193.9 basis points, according to the data provider, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Credit swaps 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.

 

Bloomberg News

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