American credit market outlook

Lincoln National Corp's debt costs have soared on concerns about investment losses and impending debt maturities, and unless markets recover or federal aid materialises, the company's capital levels are likely to come even further under pressure.
Lincoln's 4.75 percent bonds due 2014 have dropped to around 51 cents on the dollar, to yield over 21 percent, from 80 cents in early March, according to MarketAxess. Credit default swaps insuring Lincoln's bonds have jumped to around 3,000 basis points, or $3 million per year to insure $10 million in debt for five years, from 2,000 basis points a week ago, according to Markit. "They've been hit by fears about their capital losses in their portfolio, and by fears about liquidity," said Rob Haines, an analyst at research firm CreditSights. "It could become a vicious circle, potentially."
Lincoln said this week that it would repay $500 million in bonds due on Monday using internal cash resources and that it can repay $375 million of commercial paper due in May with cash, new commercial paper issuance or its $1 billion credit line.
The insurer said on March 27 that it withdrew its application to sell debt through the government's Temporary Liquidity Guarantee Program because it no longer believed it qualifies. "If Lincoln had immediate and easy access to the commercial paper market, we would expect CDS spreads to be much more moderate," analysts at broker Tradition Asiel Securities said on Friday in a report.
"The degree of change and elevation suggests that access to the CP is either expensive, difficult or both," they added. "Lincoln looks to be facing a liquidity squeeze that could ultimately see the company run out of cash." A spokesperson for the company did not return a call seeking comment. Lincoln swung to a net loss in the fourth quarter as costs for variable annuities soared, and returns from investments in hedge funds and private equity evaporated.
Debt payments, meanwhile, are coming at a time when markets are concerned that skittish customers may pull annuities from the company, which would need to be funded by selling investments at deeply depressed market prices, said CreditSights' Haines.
If Lincoln takes losses on its investments, its capital levels could come under further pressure, Haines added. Ratings downgrades could also spark new collateral calls, further straining liquidity, Haines said.
Moody's Investors Service cut Lincoln's senior debt rating one notch to Baa1, the third lowest investment grade, on March 19 and left it under review for further downgrade. Fitch Ratings cut the debt one step to A-minus, four steps above junk territory on March 3, and Standard & Poor's cut the debt to the same level in February.