Corporate America Protests Credit Swaps Show Fear, Not Reality

By Gillian Wee

Oct. 3 (Bloomberg) -- National Rural Utilities Cooperative Finance Corp. and Hartford Financial Services Group Inc. say widening credit default swaps show a disconnect between the health of their balance sheets and investor behavior.

``It's all attributable to the overall marketplace and nothing really specific to National Rural's credit,'' Chief Financial Officer Steven Lilly said in a telephone interview. ``Our credit remains strong as evidenced by the ratings and positive outlooks that we have.''

Credit-default swaps on Herndon, Virginia-based National Rural almost doubled since Sept. 22 to 164.7 basis points yesterday, CMA Datavision prices show. The company continues ``to successfully access the marketplace when we need to at the levels that are appropriate for the credit rating of the company,'' Lilly said. Moody's Investors Service rates its senior secured debt at A1 and senior unsecured debt at A2.

An increase in the contracts, used to hedge against losses or to speculate on creditworthiness, represents a decline in investor confidence. The cost to protect against corporate bond defaults has risen on concern that the credit-market crisis may engulf even some of the best-financed companies in the world, including General Electric Co. and Boeing Co.

The cost to protect against default by Hartford, Prudential Financial Inc. and MetLife Inc. soared to records and shares fell yesterday on speculation that turmoil in financial markets may be spreading to insurance companies.

``The Hartford's core operating businesses are performing well and our liquidity remains strong,'' said Shannon Lapierre, spokeswoman for the Connecticut-based insurer. ``We are confident in our financial strength and in our ability to meet our commitments to customers.''

Hartford Contracts

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 were conceived to protect bondholders against default and pay the buyer face value in exchange for the underlying securities should the company fail to adhere to its debt agreements.

One basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

For Hartford, credit-default swap traders started demanding upfront payments to protect against a default yesterday as the contracts headed toward distressed levels.

The contracts were quoted at a mid-price of 9 percentage points up front in addition to 5 percentage points a year, according to Credit Suisse Group AG, meaning it would cost $900,000 initially and $500,000 a year to protect $10 million of the companies' bonds from default for five years. That compared with $525,000 a year and no upfront payment the previous day.

Insurance Stocks Fall

Stock prices yesterday plunged 32 percent for Hartford, 15 percent for MetLife and 11 percent for Prudential on concern that the companies face losses as the value of fixed-income assets plunge amid the worst financial crisis since the Great Depression.

Part of the concern may stem from the collapse of American International Group Inc., which used a subsidiary to sell credit- default swap protection on securities linked to U.S. home loans before much of the market collapsed. AIG was seized after ratings downgrades triggered more than $13 billion in collateral calls.

``Everyone's shell-shocked and has the mentality that if this can happen to AIG, it can happen to anybody,'' said Rob Haines, an analyst at independent fixed-income research firm CreditSights Inc. in New York. ``It's completely not reflective of fundamentals.''

Boeing

Boeing, whose credit default swaps widened 50 points in the past week to 145 basis points, said there's no reason for the market to question its liquidity. Contracts on Boeing Capital Corp., Boeing's financing arm, jumped 74 basis points to a record 185 basis points, CMA data show.

``If what is driving this is the fear that Boeing Capital will have to suddenly finance a whole host of deliveries, that is unfounded concern,'' because customers with aircraft deliveries scheduled for at least the next year and a half have already identified non-Boeing financing, said Todd Blecher, a spokesman at the Chicago-based company.

The world's second-largest maker of commercial planes had $5.6 billion in cash and $4.6 billion in marketable securities as of June 30.

General Motors

For some companies, the situation may make it easier to see why swaps are rising.

General Motors Corp. saw its credit default swaps rise to a record after the automaker said Sept. 19 it was going to draw down the remainder of a $4.5 billion revolving credit line to preserve cash because of the instability in the financial markets. Detroit-based GM, the largest U.S. carmaker, has lost almost $70 billion since 2004.

``Maintaining strong liquidity is the top priority for the company,'' said GM spokesman Randy Arickx, who declined to comment specifically on trading activity. GM said July 15 that it would cut costs, sell assets and seek new debt to increase liquidity by $15 billion by the end of next year.

GM was added last month to the U.S. Securities and Exchange Commission's list of stocks temporarily protected against short sales.

To contact the reporters on this story: Gillian Wee in New York at gwee3@bloomberg.net