CDS Sentiment Shows Backing for AstraZeneca in Pfizer Takeover Battle

Pfizer’s £63bn bid to takeover UK pharmaceutical firm AstraZeneca has led to a 21% tightening of the latter’s credit default swap (CDS) position on global markets as it promotes higher revenue targets as part of its defence, says Fitch, while conversely Pfizer’s CDS position has widened 28% amid fears that it may take on too much debt to facilitate the deal.

In a CDS case study research note showing the respective pharmaceutical giants positions during May on Fitch Solutions CDS Pricing Service benchmark, the ratings agency’s tech and modelling unit has drawn some conclusions about market sentiment over Pfizer and AstraZeneca’s creditworthiness and what this might mean for the future ratings of the pharma firms.

According to Fitch Solutions its CDS assessment service provides credit risk indicators that are designed to provide real-time, market-based views of creditworthiness. As such, the firms claims its pricing information can and often does reflect more short term market views and be indicative of market sentiment in cases such this. This is in contrast to the ratings agency’s Issuer Default Ratings (IDRs), which are based on a more forward-looking fundamental credit analysis over an extended period of time.

“Credit protection for both pharmaceutical giants is still pricing strong, though market sentiment appears to be improving for AstraZeneca and souring for Pfizer,” said Fitch Solutions’ director, Diana Allmendinger, in the note.

“Part of the reason may be that AstraZeneca has announced aggressive revenue targets in an effort to ward off a potential Pfizer takeover,” speculated Allmendinger, while conversely, “the markets are anticipating that Pfizer would likely have to take on debt to acquire AstraZeneca, which would stress its leverage ratios.”

If Pfizer’s second £63bn contested bid to takeover AstraZeneca is ultimately successful it would be the biggest takeover in UK corporate history. It has led to questions in Parliament and in the US about the tax regime Pfizer would benefit from – with the lower 20% corporation tax in the UK thought to be one of the drivers for the deal – and about where its research and scientific activities would be carried out.

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