US CREDIT-Pfizer CDS show Wyeth deal no sure thing
By Karen Brettell
NEW YORK, Jan 26 (Reuters) - Credit default swaps insuring the debt of Pfizer Inc (PFE.N) are reflecting uncertainty over the fate of the company's planned acquisition of Wyeth WYE.N, and if the deal goes through as planned its CDSs are likely to weaken from current levels.
Pfizer said on Monday it would acquire rival drugmaker Wyeth for $68 billion in a deal designed to soften the blow of losing its biggest product to generic competition. For details, go to [ID:nN26367941]
CDSs insuring Pfizer's debt jumped to a record 125 basis points on Monday, or $125,000 per year to insure $10 million for five years, as looming credit downgrades from the additional $22.5 billion in debt planned to fund the purchase weighed on its bonds.
The CDS levels, however, still indicate doubt over whether the deal will be completed.
"At 125 basis points the CDS market is giving the deal a 50/50 chance," said Gary Kelly, director of research at broker Tradition Asiel Securities. "I don't think it's a total done deal."
Standard & Poor's said it expects to cut Pfizer's rating to "AA," the third highest investment grade, if the deal is completed as planned. Moody's Investors Service said it is likely to cut the firm to "A1," the fifth highest investment grade.
"Moody's A1 rating would imply CDS spreads should be a little higher than they are now, the average for A1 is 150 basis points or higher," Kelly said.
"I think there's a little bit of skepticism because its not the perfect environment to get any sort of debt raising done," he added. "That said, if anyone could do it you'd think a company like Pfizer could."
Rohm and Haas Co ROH.N sued Dow Chemical Co (DOW.N) on Monday after Dow refused to close its $15.3 billion takeover of its rival, demonstrating how challenging it is to complete big deals amid the global economic downturn. [ID:nN26354885]
Credit default swaps based on Wyeth's debt, meanwhile, have significantly outperformed those on Pfizer, weakening to only 70 basis points on Monday, from 67 basis points last Thursday.
One factor keeping Wyeth's swaps relatively tight may be the expectation that the company's bonds will be repaid as part of the acquisition, leaving the CDSs effectively insuring no debt, a process known as orphaning.
"There is some talk of the possibility that Wyeth's bonds go away on this, and that is why Wyeth's spreads are being held down," said Tim Backshall, chief derivatives strategist at Credit Derivatives Research in Walnut Creek, California. "But there is nothing to suspect that this is the case so far."
If the deal proceeds as planned Wyeth's ratings are likely to be raised to the same level as Pfizer's and CDSs on Wyeth, if the bonds are not repaid, should weaken to similar levels as Pfizer's.
"There's a number of hurdles that have to get cleared," said Tradition's Kelly. "I would expect CDS levels to notch up as we clear those, and ultimately converge."
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