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Derivatives

Ratings Downgrade Causes Dow's Spreads To Widen

Credit-default protection on The Dow Chemical Co. widened 100 basis points on Wednesday after Fitch downgraded the science and technology company, with USD30 billion in annual sales, to A from A plus and put it on negative outlook. Credit spreads on Dow widened to about 150bps last Wednesday from 50bps a week earlier as bulge bracket firms looked to buy protection.

"It's been nothing but bad news for these guys since the beginning of the third quarter. Spreads have tripled since last week," said one New York based credit-default swap trader. The widening spreads were fueled in part by speculation among sell-side analysts that the chemical company in Midland, Mich. could suffer huge asbestos liabilities stemming from its acquisition of Texas-based Union Carbine Corp, which made it the largest chemical company in the world. After Dow reached a settlement two weeks ago in an asbestos lawsuit filed against Union Carbine its stock plummeted 22%. Analysts fear more lawsuits will follow.

The uncertainty surrounding the total size of asbestos-related liability claims and how they may ultimately impact on Dow's cash outflows is part of the reason why Fitch has put the company on negative outlook, according to Omar Jama, analyst at Fitch in Chicago.

 

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