Company Default Risk Rises as Recession, Lending Concerns Mount

(Bloomberg) -- The risk of companies defaulting rose after reports showing a contracting U.S. service industry and tightening lending standards by banks fueled concern that borrowers will find it tougher to raise cash.

Benchmark credit-default swap indexes in the U.S. and Europe reached the highest levels in two weeks, a sign of eroding investor confidence in corporate creditworthiness. Contracts tied to the bonds of SLM Corp., the biggest U.S. student lender, rose after Standard & Poor's late yesterday cut the company's credit rating to one level above junk. Contracts on NXP BV, the chipmaker bought by a Kohlberg Kravis Roberts & Co.-led group, soared to the highest on record.

U.S. service industries unexpectedly shrank in January at the fastest pace since the last U.S. recession, an Institute for Supply Management index showed today. Banks lifted borrowing costs and made it harder for companies and households to raise funds over the past three months, the Federal Reserve's Senior Loan Officer Opinion Survey yesterday showed.

The weak economic and lending data ``is going to question people's ability to be optimistic about whether the monetary and fiscal stimulus is enough to turn things around later in the year,'' said Matthew Mish, a credit strategist at Barclays Capital in New York. Investors ``are going to have to confront the reality that the financial markets across the board are still extremely distressed and things aren't functioning properly.''

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates worsening perceptions of credit quality; a decline, the opposite.

CDX North America

The Markit CDX North America Investment Grade Index, a benchmark gauge of default risk tied to the bonds of 125 companies, climbed 7.5 basis points to 117 basis points at 10:11 a.m. in New York, according to Deutsche Bank AG. In Europe, Markit iTraxx Crossover Index of 50 companies with mostly high- risk, high-yield credit ratings soared 34 basis points to 503. In Asia, the Markit iTraxx Japan index increased 3 to 68.

A gauge of investor confidence in the U.S. high-yield, high- risk loan market fell to the lowest since it started trading Oct. 3. The LCDX Series 9, which falls as sentiment worsens, dropped as much as 0.55 point to 92.2, according to Goldman Sachs Group Inc.

Sallie Mae

Credit-default swaps on Reston, Virginia-based SLM, known as Sallie Mae, climbed 35 basis points to 435 basis points, according to broker Phoenix Partners Group in New York, the biggest climb in two weeks. S&P cut the company's credit rating to BBB- and said it may lower it further on concerns that ``higher funding costs, reduced profitability and potential asset quality deterioration will keep pressure on'' the company.

Contracts on NXP BV, soared 97 basis points to 943, according to CMA Datavision in London. KKR's purchase of Eindhoven, Netherlands-based NXP for 3.4 billion euros in August 2006 was ill-conceived because the chip industry relies on economic growth more than other businesses, the Financial Times today said in its ``Lex'' column. While it's unlikely the company will go bankrupt, the buyout firms probably won't achieve the profit levels they expected, the paper said.

Financial companies are reluctant to lend because they may face losses exceeding $265 billion on securities linked to subprime mortgages, Standard & Poor's said last week.

 

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