Schering-Plough rallies; Chesapeake Energy, Nuance active; Anixter, EMC drop; VeriSign on the way

By Evan Weinberger

New York, Aug. 14 - A comeback in Schering-Plough Corp.'s new issue and active trading in other newer issues from Chesapeake Energy Corp. and Nuance Communications, Inc. highlighted convertibles trading Tuesday.

With only one new issue - VeriSign Inc.'s $1.1 billion in convertible debentures due 2037 - slated to price Tuesday night, investors looked to consolidate positions in recent new issues. Other than that, according to an analyst, Tuesday was another day with a fair number of bids, a somewhat equal number of asks and two sides that, more often than not, couldn't come together.

"A lot of people [were] looking for markets, but [there was] not that much trading," the analyst said.

Convertibles issued by Anixter International Inc. and EMC Corp. moved lower Tuesday in other secondary action.

Part of the reason for buyers' and sellers' inability to reach deals may have been another down day on Wall Street. The Dow Jones Industrial Average dropped 207.61 points, or 1.57%, to close at 13,028.92. The Nasdaq and the Standard & Poor's 500 were also down Tuesday. The Nasdaq slipped 43.12 points, or 1.70%, to close at 2,499.12. The S&P 500 was the biggest loser on the day, closing down 26.38 points, or 1.82%, with a finish of 1,426.54.

A guarded outlook from Wal-Mart for the rest of the year, poor returns from Home Depot and the announcement by Sentinel Management Group Inc., which oversees $1.6 billion in investments, that it was halting investor redemptions stole the day from an improved report on inflation.

One analyst said that despite Tuesday's big loss, the tone was improved from last week. And, he cautioned, the relatively small number of people doing the trading magnified every move.

"I think it's somewhat more muted," he said. "I'm not too concerned. I don't necessarily think we're going back to last week."

Another analyst said that while the recent volatility would normally be a boon for convertibles, the other factors surrounding the volatility - credit disquiet and investor sentiment - were acting to bring convertibles in a bit.

"I'd say we're doing OK," a third analyst said. "The only problem is widening credit spreads - which often get much wider in tandem with stock price declines, since the same news and/or fears that drive the stock down also cause the creditworthiness to be questioned."

Even a market in decline presents opportunities, the analyst added. "Busted convertibles often exhibit much higher deltas than quantitative models would suggest," he said.

VeriSign is launching $1.1 billion in convertible senior debentures due 2037 into this landscape. The debentures are talked at a coupon of 2.75% to 3.25% with an initial conversion premium of 20% to 22.5%.

Most analysts and traders have focused on the lack of puts in the debentures as a reason to stay away. Others have noted that VeriSign, a Mountain View, Calif.-based voice and data network services provider, is about as far from the troubled mortgage sector as can be and, according to one analyst, it's "not a bad credit." However, even those who said it was a decent credit from a decent company did say that the lack of puts and protection would lessen the debentures' value in investors' eyes.

New issues drive the market

With all of the jockeying and rumors of hedge funds losing serious value, it appears that convertibles investors are more or less sticking it out. While some convertibles have been coming in as credit spreads widen, in general the losses have been relatively contained, according to analysts.

"I think in general it's been the theme for the month," one analyst said. "[I'm] not saying that today's anything special. In fact things aren't coming in that much today. I would say it's been relatively quiet for what's been going on out there."

Part of the reason has been the continued appearance of new deals from relatively stable companies, which tend to drive the convertibles market in general.

Schering-Plough's 6% mandatory convertible preferred stock due Aug. 13, 2010 was among the movers Tuesday. The convertibles, which priced Friday at a liquidation price of $250 per share on a $2.5 billion offering, were rated BBB- by Fitch Ratings on Tuesday.

They closed Tuesday at 252, just over par, versus a closing stock price of $28.31, continuing a steady climb. They closed Friday at 246 versus a closing stock price of $27.26.

The Kenilworth, N.J.-based pharmaceutical company saw its stock (NYSE: SGP) pick up 6 cents, or 0.21%, on Tuesday.

Also active Tuesday were Chesapeake Energy's 2.5% convertible senior notes due May 15, 2037, which priced Aug. 8. The convertibles closed at 96 versus a closing stock price of $33.60 after closing at 97.625 versus a stock price of $34.20 on Monday.

The Oklahoma City-based oil and natural gas drilling and exploration company saw its stock (NYSE: CHK) close down 60 cents, or 1.74%, on Tuesday.

A third recent new issue, Nuance Communications' 2.75% senior convertible debentures due Aug. 15, 2027, was also active Tuesday. Those debentures priced Aug. 7.

The debentures closed at 113.5 versus a closing stock price of $18.45. They had been trading at 105 versus a stock price of $16.76 on Aug. 8.

Stock in Burlington, Mass.-based Nuance (Nasdaq: NUAN), a speech and imaging services provider, gained 8 cents, or 0.44%, on Tuesday.

Two notable declines

Anixter International, a Glenview, Ill.-based communications and wire distributor, saw its 1% convertible senior notes due Feb. 15, 2013 take a noticeable fall Tuesday, although they still remain well up above par.

The convertibles closed at 129.25 versus a closing stock price of $75.33. They closed at 133.375 versus a stock price of $78.40 on Monday.

Anixter stock (NYSE: AXE) closed down $3.07, or 3.92%, on Tuesday.

EMC Corp. saw its 1.75% convertible senior notes due Dec. 1, 2013 close at 130.63 versus a stock price of $18.34 on Tuesday. They closed Monday at 133.875 versus a $19.05 stock price on Monday.

EMC is a Hopkinton, Mass.-based information infrastructure developer. The company's stock (NYSE: EMC) dumped 71 cents, or 3.73%.

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