By Melissa Mott
NEW YORK, Aug 29 (IFR) - The cost of insuring VerizonCommunication's debt against default is expected to rise furtherin coming weeks if its plans to take control of Verizon Wirelessare successful.
Verizon's five-year credit default swaps initially widenedby around 20%, or 15.5bp, to 87.75bp on Thursday on expectationsthat the company would have to raise as much as USD60bn of debtto buy out Vodafone Group's 45% stake in the business.
By midday, Verizon's CDS had stabilized around 84bp, butsome traders predict that levels could spike to 110-115bp, oreven higher, if the deal goes through. Liquidity gained tractionthough the day, and flows were two-way in the name, traderssaid.
Barclays analysts said last month that Verizon's CDS could"overshoot" into the low 100s although they see fair valuecloser to 85-95bp. The analysts calculated Verizon would haveUSD5.5bn in funding needs through the first quarter of 2014,especially if it opts to maintain its dividend.
Speculation of a deal has been building for months, andVodafone on Thursday confirmed that the two were in talks.Verizon could pay USD130bn, Bloomberg reported on Thursday,while Reuters reported in April that Verizon had hired advisorsfor a possible USD100bn bid.
RATINGS ACTION
The structure of the financing, and how it would bepotentially split between loans and bonds, as well as anysubsequent rating action, would also help to drive CDSvaluations.
Verizon is rated A3/A-/A with stable outlooks from all threerating agencies.
In June, Moody's said its A3 rating could be jeopardized ifVerizon were to pay the touted USD130bn. This would crimp itsability to deleverage and free cash flow would likely decline.However, the agency did not speculate how much of a ratingsimpact it would have.
Likewise, in May, Fitch affirmed Verizon and said its Arating was supported by robust free cash flows, giving it someflexibility with leverage targets, although it also warned ofnegative ratings action if a deal was struck.
From a CDS perspective, Verizon is a staid name.
Its CDS credit curves are mildly steeper, including the 3s5sand the 5s10s, which suggests a more bullish view. Up untilThursday, its five-year CDS spread had also traded tighter thanthe current on-the-run CDX.IG20.
As for the TMT sector as a whole, Barclays said this week,it anticipates a big push in September issuance amid the risinginterest rate environment, end of second-quarter blackout and ahungry investor base. While some issuers are expected withrefinancings of borrowings, Verizon remains an event drivenname. (Reporting by Melissa Mott, IFR Markets; Editing by NatalieHarrison)