By Abigail Moses and Kate Haywood April 22 (Bloomberg) -- Investors are paying record high rates to protect bonds of banks in Europe from default relative to the rest of the market as the region’s fiscal crisis deepens, while payments tied to the debt of U.S. financial companies soar on concern about tougher regulation. The Markit iTraxx Financial Index of credit-default swaps is about 20 basis points higher than the corporate Markit iTraxx Europe Index, according to JPMorgan Chase & Co. As recently as January, the relationship was reversed. Credit swaps on U.S. banks rose as investors speculated a Securities and Exchange Commission lawsuit against Goldman Sachs Group Inc. boosts chances of a legislative overhaul. The International Monetary Fund called Greece’s fiscal crisis a “wake-up call” on sovereign-debt risks as the country began talks on activating a 45 billion-euro ($61 billion) emergency aid package. Even after Goldman Sachs and Morgan Stanley reported earnings this week that beat analyst estimates, default risk climbed as a Senate panel approved derivatives legislation that would require lenders to spin off their swaps trading desks. “Tighter regulation certainly won’t help banks increase profits in the near term,” said Jeffrey Burch, co-head of global credit at Investec Asset Management in London, which manages more than $65 billion. Investors are also “reacting to the risk of spillover from Greece,” he said. Blackstone Debt Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government debt fell 1 basis point yesterday to 142 basis points, or 1.42 percentage point, the lowest since November 2007 and down from a record 511 basis points in March 2009, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. Average yields dropped 2.6 basis points to 3.903 percent, the lowest since June 2005. Blackstone Group LP may ask creditors to restructure $4.94 billion of debt remaining from its 2007 purchase of Sam Zell’s Equity Office Properties Trust, according to two people familiar with the discussions. Blackstone would consider paying down about 5 percent of the balance and agreeing to a slightly higher interest rate in exchange for extending the maturity, according to the people, who declined to be identified because the talks are private. The debt, which was packaged and sold as a commercial mortgage- backed bond in June 2007, matures in 2012, according to data compiled by Bloomberg. Toyota Downgraded Toyota Motor Corp.’s credit rating was cut by Moody’s Investors Service to Aa2 from Aa1 as the ratings company said it expects profit at the world’s largest carmaker to stay at “a low level” through at least 2012. Toyota has said it may face at least $2 billion in lost sales and warranty repairs after recalling more than 8 million vehicles globally for defects with accelerator pedals. It has agreed to pay a record $16.4 million U.S. fine for failing to promptly report flaws, while denying breaking safety rules. A lower credit rating indicates a higher risk of a default and can raise borrowing costs. Fitch Ratings said today “there is a possibility” it will lower the credit grades for the carmaker, while Standard & Poor’s will decide by the middle of next month whether to reduce or affirm its ratings. Mortgage-Backed Securities Citigroup Inc. is attempting to sell $222.4 million of securities backed by new mortgages, the first transaction of its type in more than two years. Citigroup, which made the 255 loans in the past 11 months, is underwriting the potential sale with JPMorgan as co-manager, according to people familiar with the matter who declined to be identified because the sale is private. Redwood Trust Inc., the Mill Valley, California-based real estate investment trust that specializes in jumbo-mortgage assets, is being called the securitization’s sponsor, which may mean it will buy more-junior classes, the people said. Issuance of home-loan bonds without government-backed guarantees peaked at almost $1.2 trillion in both 2005 and 2006 before freezing as the worst U.S. housing slump since the Great Depression sparked record plunges in their prices that weakened investors and curbed lending, according to the newsletter Inside MBS & ABS. U.S. 10-year interest-rate swap spreads turned positive for the first time in two weeks amid speculation the government may begin reducing the amount of debt it sells as the economy strengthens. Swap Spreads The difference between the rate to exchange fixed- for floating-interest payments for 10 years and similar-maturity Treasury notes, known as the swap spread, touched 0.13 basis point from negative 1.25 basis points April 20. The spread was last positive on April 6, when it touched 3.25 basis points. A basis point is 0.01 percentage point. In emerging markets, the extra yield investors demand to own bonds instead of Treasuries rose 6 basis points to 242 basis points, according to the JPMorgan Emerging Market Bond Index. Gramercy, a Greenwich, Connecticut-based investment fund, is “predisposed” to accept Argentina’s offer to restructure $20 billion in defaulted bonds held out of a 2005 settlement, Managing Partner Robert Koenigsberger said in an e-mailed statement. Russia is scheduled to raise at least $4 billion in its first international bond sale since defaulting in 1998. The government plans to sell bonds due in 2015 at about 125 basis points more than similar-maturity U.S. Treasuries and 2020 notes at a premium of about 135 basis points, according to two people with knowledge of the deal. The bond is driving borrowing costs to record lows for companies from OAO Gazprom to VTB Group, the nation’s second-biggest bank. Egyptian Sale Egypt plans to raise $1.5 billion of bonds after adding a 30-year note to its first overseas sale of dollar debt in nine years, according to a banker involved in the transaction. The country may sell $1 billion of 10-year notes to yield about 5.875 percent and $500 million of 30-year bonds to yield about 7 percent, said the banker, who declined to be identified because terms aren’t set. Greek government officials joined with representatives of the European Union, IMF and European Central Bank in Athens to begin hammering out the deficit-cutting measures Europe’s most indebted nation will have to accept to be able to tap the funds. The iTraxx European financial gauge on 25 banks and insurers jumped 4.75 basis points yesterday to 102.5, the highest in two months, while the corporate benchmark rose 2.75 to 83, JPMorgan prices show. An increase in the index signals deteriorating perceptions of credit quality. Debt Risk Credit-default swaps on Spanish and Portuguese banks led the increase in financial debt risk in Europe, with contracts on Banco Commercial Portugues SA surging 25 basis points to 265, Banco Espirito Santo SA climbing 20 basis points to 269.5 and Banco Santander SA 12 basis points higher at 144, according to CMA DataVision prices. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt commitments. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. Concern over Greece’s creditworthiness pushed the spread between the government’s 10-year bonds and benchmark German debt to 516 basis points, the highest in at least 12 years. Credit- default swaps tied to Greece’s debt jumped 19 basis points to a record close of 488, CMA prices show. Emergency Aid Greece needs to raise 10 billion euros by the end of May, according to the debt management agency’s data. The country could activate the emergency aid package before the talks in Athens conclude in two weeks’ time, Finance Minister George Papaconstantinou said. Credit-default swaps on other European governments also soared as investors used the derivatives as a proxy for Greece as well as hedging against contagion. Contracts on Spain’s government debt climbed 15 to 160 basis points while Portugal advanced 31 to 232, CMA prices show. The cost of protecting Asia-Pacific corporate and sovereign bonds from default increased, with the Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan climbing 3 basis points to 96.5, Barclays Plc prices show. The Markit iTraxx Japan index added 1.5 basis points to 92, the highest level since April 9, according to Morgan Stanley and CMA prices. The Markit iTraxx Australia index rose 2 basis points to 82.5, according to ICAP Plc. JAL Auction Goldman Sachs, Barclays and 12 other banks today fixed a settlement price for credit-default swaps on Japan Airlines Corp., after Asia’s biggest carrier filed for bankruptcy in January. Sellers will pay buyers 80 yen for each 100 yen of JAL’s insured debt, according to auction administrators Markit Group Ltd. and Creditex Group Inc. JAL is slashing workers, retiring planes and cutting 31 routes as it restructures under a 900 billion yen ($9.6 billion) plan after filing for Japan’s fourth-largest bankruptcy. The airline follows Aiful Corp. in settling a swaps price at auction after the consumer lender completed Asia-Pacific’s first such auction last month. Credit-default swaps on Goldman Sachs, the most profitable firm in Wall Street history, jumped 10 basis points to a two- month high of 134. Contracts on Morgan Stanley rose 7 basis points to 148.5, JPMorgan climbed 3 to 74 and Bank of America Corp. increased 11 to 137, according to CMA. The benchmark Markit CDX North America Index was little changed at about 88 basis points, according to index administrator Markit Group. To contact the reporters on this story: Abigail Moses in London at Amoses5@bloomberg.net; Kate Haywood in London at khaywood@bloomberg.net

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