Merrill removes Schering-Plough mandatory from convertible portfolio on equity downgrade to neutral

By Ronda Fears

Nashville, Jan. 27 - Merrill Lynch & Co. has removed the Schering-Plough Corp. mandatory from its recommended convertible portfolio on the firm's downgrade in the underlying equity to neutral.

Schering-Plough's 6% mandatory due 2007 (Baa3/BBB) was included in the portfolio as an equity alternative due to its equity sensitivity. Thus, convertible analyst Marc Malloy noted in a report Thursday that given the 0.725 delta and lower equity outlook, the opinion on the mandatory was reduced to neutral.

With the convertible at 54.04 and the stock at $19.77, Merrill analysts estimate payback in four years. Still, the analysts put theoretical value on the convertible at 54.43, or a 0.72% discount to the current price, based on a credit spread of 131 basis points over the five-year Treasury and a volatility cap of 40%.

Merrill pharmaceuticals analyst David R. Risinger downgraded Schering-Plough shares to neutral from buy based on the company's inability to rule out future Vytorin or Zetia label changes, management's "unwillingness to project future financial results" and lower EPS assumptions.

Risinger's research team continues to believe that Schering-Plough's turnaround potential is significant, but given the current perception of risks, they are no longer comfortable rating the stock a buy, Malloy explained.

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