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."