Five-year credit protection on The Dow Chemical Co. blew out 15 basis points last week following a downgrade of its subsidiary Union Carbide. Credit-default swaps in Dow traded at 85bps last Wednesday, compared with around 70bps the previous week. Protection on Union Carbide, meanwhile, fattened to 600bps from 350bps over the same period, according to a trader.
Although Dow Chemical is distancing itself from Union Carbide, the problems of the subsidiary continue to affect the name, said the trader. The blowout came in a week of otherwise thin liquidity in the credit derivatives markets, with one trader noting that trading just felt like "dealers pushing prices around." With no upsets on the horizon spreads are likely to continue their overall tightening trend, he predicted.
Moody's Investors Service rates Dow B1 and has it on negative outlook and Union Carbide is Baa2 and also on negative outlook. The subsidiary was downgraded from B1 on negative outlook on Sept. 5. Stephen Beck, associate analyst in New York, explained that the downgrade was a combination of several factors affecting the firm's asbestos business. The U.S. Congress had been debating offering legislative relief with regards to asbestos, however, this has failed to materialize and appears unlikely. The lack of transparency of Union Carbide's asbestos liabilities, as well as the subsidiary's reliance on Dow for financing and as a customer also weigh on its rating, he said.
Five-Year Mid-Market Protection On Dow Chemical