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By Shannon D. Harrington and Pierre Paulden
Credit-default swaps rose as German Chancellor Angela Merkel’s curb on using the contracts to speculate on European sovereign debt sparked concern among investors about increasing government regulation.
The Markit iTraxx Crossover index of swaps on 50 European companies jumped 37 basis points to 569, according to Markit Group Ltd. The index typically rises as investor confidence deteriorates.
Merkel’s coalition stopped traders buying default protection on government bonds they don’t own, so-called naked swaps, as German lawmakers prepare to debate a bill authorizing a $1 trillion bailout to backstop the euro. The unexpected ban, done independently of the European Union, came after the rescue package failed to stop the 16-nation common currency from weakening to a four-year low and as banks became increasingly reluctant to lend to one another.
“The market sees an inadequate policy such as this as an act of desperation and a refusal to address the fundamental problems at hand,” said Brian Yelvington, head of fixed-income strategy at Knight Libertas LLC in Greenwich, Connecticut.
Prohibiting speculation in the contracts may cause trading in swaps tied to Europe government bonds to freeze up, said Tim Backshall, the chief strategist at Credit Derivatives Research LLC in Walnut Creek, California. Trading limits may increase borrowing costs or limit the flow of capital, he said.
Asia-Pacific
The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan rose 15 basis points to 136.5, Royal Bank of Scotland Group Plc prices show. The Markit iTraxx Japan index climbed 14.5 basis points to 138.5 as of 9:10 a.m. in Tokyo, according to Morgan Stanley.
In New York, the Markit CDX North America Investment Grade Index Series 14 climbed 10 basis points to close at 118, according to Barclays Capital.
Elsewhere in credit markets, the extra yield investors demand to own corporate bonds instead of government debt rose 1 basis point to 172 basis points, or 1.72 percentage point, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. The spread peaked at 511 on March 30, 2009, and dropped to as low as 142 on April 21. Average yields fell 4.1 basis points to 3.905 percent.
Ford’s Credit Rating
Ford Motor Co.’s credit rating was raised one level to B1, within four steps of investment grade, by Moody’s Investors Service on demand for new models and lower costs.
The upgrade includes the Ford Motor Credit finance unit and affects about $65 billion in debt. Moody’s outlook on the only major U.S. automaker to avoid bankruptcy last year is “stable.”
The company’s 7.45 percent bonds due July 2031 rose 0.5 cent to 88.5 cents on the dollar as of 3:52 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bonds have climbed from a low this year of 82.85 cents on Feb. 9.
“Ford now has a healthy and sustainable operating model,” Bruce Clark, Moody’s senior vice president, said in a statement. “As demand in the U.S. continues to recover through 2011, Ford is well-positioned to generate stronger operating performance and cash flow.”
First Data Bonds
First Data Corp. bonds tumbled to the lowest levels since at least September as prospects for an initial public offering faded after a quarterly loss. The company’s $3.52 billion of 10.55 percent notes due in 2015 fell 2.5 cents to 77.75 cents on the dollar, Trace prices show. The notes were quoted at 92 cents on the dollar as recently as March 10. The credit-card processor, based in Atlanta, reported a $240 million loss for the three months through March.
“The first-quarter results suggest to us that an IPO is not likely in the near term,” Dave Novosel, an analyst with corporate bond research firm Gimme Credit in Chicago, wrote in a note yesterday.
First Data, purchased by Kohlberg Kravis Roberts & Co. in 2007 for $27.5 billion, hasn’t discussed the timing of an IPO, a “potential strategy” for a company of its size, spokesman Chip Swearngan said. First Data doesn’t comment on analyst reports, he said.
Universal Health Services Inc. started offering terms on $4.15 billion of loans being used to buy Psychiatric Solutions Inc. and refinance existing debt.
Universal Health
The operator of more than 100 U.S. medical facilities is seeking an $800 million revolving credit line, a $500 million term loan and another $2.85 billion term loan, according to a commitment letter from lenders attached to a filing yesterday with the U.S. Securities and Exchange Commission.
The company, based in King of Prussia, Pennsylvania, will pay an initial margin of 3.5 percentage points over Libor on the bigger term loan. The six-year loan has a 1.5 percent floor for the lending benchmark, according to the letter.
Universal Health is buying Franklin, Tennessee-based Psychiatric Solutions in a transaction valued at about $3.1 billion, including assumption of debt.
Emerging-market bonds weakened, with the spread to Treasuries climbing 15 basis points to 309 basis points, the highest since this year’s peak of 328 on May 7, according to JPMorgan Chase & Co.’s Emerging Market Bond index.
Argentina’s government doesn’t need to sell new international bonds to finance spending this year following its $18.3 billion debt restructuring, said Jane Eddy, the Latin America director for Standard & Poor’s.
Emerging Markets
“The government can make it through 2010 with or without the new sale of bonds,” Eddy said in an interview in Buenos Aires. “There are certainly other sources of funds domestically and within the government itself that can be tapped for 2010.”
Economy Minister Amado Boudou said May 17 in Rome the country plans to sell $1 billion in bonds after its debt swap ends next month. A restructuring would give Argentina access to international credit markets for the first time since its record $95 billion default in 2001.
Germany’s ban, which took effect at midnight Frankfurt time and lasts until March 31, 2011, also applies to the shares of 10 banks and insurers, German financial regulator BaFin said in an e-mailed statement. The step was needed because of “exceptional volatility” in euro-area bonds, BaFin said.
The regulator didn’t provide details on how it will enforce the ban, or whether it would extend to trades outside Germany. The majority of credit-default swap trading takes place in New York and London.
‘Meaningless’
The move may have little effect unless the U.S. does the same, according to Hisayoshi Nogawa, a strategist at BNP Paribas Securities Japan Ltd. in Tokyo.
“It would be meaningless to regulate only in Europe if they are targeting hedge funds,” he said in a telephone interview today. Much “depends on how the U.S reacts to this.”
The announcement came the same day that a report showed German investor confidence plunged in May as Europe’s deepening debt crisis stoked concern about the euro’s future. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations dropped to 45.8 from 53 in April, the biggest decline since the collapse of Lehman Brothers Holdings Inc. in September 2008.
Concern that nations led by Greece will struggle to meet the EU’s requirements to lower their budget deficits has driven the euro to below $1.22 from last year’s high of $1.5144 in November.
Interbank Tensions
The London interbank offered rate, or Libor, the rate banks charge to lend to each other, rose for a sixth straight day, reaching 0.465 percent, the highest since Aug. 5, according to data from the British Bankers’ Association. The dollar Libor-OIS spread, a gauge of banks’ reluctance to lend, was about 24 basis points, up from 6 basis points in March.
The three-month Singapore interbank offered rate, or Sibor, rose to 0.46 percent yesterday, the highest level in nine months, according to the city state’s Association of Banks.
“We have seen tensions rise in interbank markets as renewed concerns regarding counterparty risk among banks have intensified,” Loredana Federico, an economist at UniCredit SpA in Milan, wrote in an e-mailed report. “Given that some sovereign debt tensions will accompany us for a while, new waves of increasing risk aversion within the banking system cannot be ruled out.”
German Finance Minister Wolfgang Schaeuble said the government decided it was best to introduce the ban on naked short-selling as soon as possible. “If you do something like this, you don’t let it drag out but you implement it right away,” he said in an interview on ZDF television.
Political Battle
Merkel and French President Nicolas Sarkozy have called for curbs on speculating with sovereign credit-default swaps. EU Financial Services Commissioner Michel Barnier called this week for stricter disclosure requirements on the transactions. Last month, the EU proposed that the Financial Stability Board, set up by the Group of 20 nations to monitor financial trends, “closely examine the role” of swaps on sovereign bonds.
“In some ways, it’s a battle of the politicians against the markets” and “I’m determined to win,” Merkel said May 6. “The speculators are our adversaries.”
The move may also add to concern the EU nations aren’t working in coordination.
‘Knee-Jerk Panic’
“Since it’s not synchronized, it smacks of knee-jerk panic,” said Scott MacDonald, head of credit and economics research at Aladdin Capital Holdings LLC in Stamford, Connecticut, which oversees $12.5 billion. “This has a huge potential impact on credit-default swaps. You’re saying CDS is evil.”
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. The contracts are used to hedge against losses on corporate debt and bet on creditworthiness.
Bets made with swaps on the bonds of 10 European nations including Greece, Spain, Italy and Portugal total less than $108 billion, according to the Depository Trust & Clearing Corp., which runs a central registry that captures most trading. That’s 0.97 percent of the $11 trillion in outstanding debt of those countries, International Monetary Fund data show.
BaFin itself said two months ago it found “no evidence” that credit-default swaps were being used excessively to speculate against Greek bonds. Depository Trust data “do not support the conclusion that speculation is taking place on a massive scale,” the regulator said in a March 8 statement on its website.
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