Schering-Plough makes debut; Countrywide battered by misunderstanding; market has 'choppy' Friday

By Evan Weinberger

New York, Aug. 10 - Schering-Plough Corp. did the unusual and priced a convertible on Friday, highlighting a day that saw many offers, fewer bids and Countrywide Financial Corp. convertibles and stocks taken down based on a misunderstood Securities and Exchange Commission filing.

One analyst described the convertibles market Friday as "choppy." But he added he didn't necessarily see a flight to supposed safe harbor convertibles - companies with good credit that issued short-term paper - at this point. "I don't know if we're really seeing that," he said. "We've seen a few people picking around, but not a lot of people buying."

Among active issues in the secondary market were Medtronic Inc., Wyeth, Wells Fargo & Co. and CapitalSource Inc.

As has been the case in recent weeks, the equity markets zigzagged, with the line graph tracing the day's trading pattern resembling the tracking of an electrocardiogram.

The Dow Jones Industrial Average began the day in a steep dive, losing more than 210 points in early trading. The index regained most of those losses as the day went along and hovered between 50 and 100 points lower for most of the day, although there were a few spikes where it went into positive territory.

Much of the improvement was due to the Federal Reserve kicking in an additional $38 billion to financial institutions to alleviate credit concerns after making a similar move Thursday.

While that temporarily assuaged some fears, it is unclear what long-term effect the additional funds will have. "The Fed has limited ability to solve a crisis like this. You've got to want to lend, or want to borrow," an analyst said.

The Dow ended the day down 31.14 points, or 0.23%, to close at 13,239.54.

The Nasdaq followed a similarly funky pattern, finishing 11.60 points, or 0.45%, lower at 2,544.89.

An analyst said this being an August Friday probably helped stave off a further panic by thinning out the number of people paying attention to the market. "It's a controlled panic," he said.

And that analyst didn't expect market watchers to spend much time trying to take stock of stocks or other securities over the weekend. "I think they'll be drunk," he said. "I think people need the weekend to decompress."

Rare Friday new deal trades lower

That seemingly rarest of occurrences came to pass on Friday, when Schering-Plough priced its $2.5 billion in 6% mandatory convertible preferred stock due Aug. 13, 2010 with a 22.5% initial conversion premium.

The securities, which were originally announced on Aug. 2, came in at the cheap end of dividend talk, which had been 5.5% to 6%, and square in the middle of conversion premium talk, which had been 20% to 25%.

Schering-Plough is issuing 10,000 shares of the convertibles, which will trade under the New York Stock Exchange ticker symbol SGP PbR. Each share has a liquidation preference of $250. There is a 1.5 million share greenshoe on the convertibles, which is equal to $375 million.

The mandatories are convertible into between 74.206 million and 90.909 million shares, for an upper conversion price of $33.69.

At the same time, Schering-Plough priced 50 million shares of common stock at $27.50, which is the base price of the convertibles. Schering-Plough built in a 7.5 million greenshoe on the common stock.

Kenilworth, N.J.-based pharmaceutical maker Schering-Plough plans to use the proceeds of the offering, which is a combined $3.9 billion, to partially fund its previously announced acquisition of Organon BioSciences NV. The acquisition was announced March 12 and is scheduled to close by the end of 2007. If that deal is canceled, the proceeds will be used for general corporate purposes.

Perhaps the deal hitting the street on a Friday caused an expected strong start for the convertibles to not materialize. It could have also been just the general market instability.

But the convertibles, which were offered at $250, started trading out of the shoot at $244, according to one trader. The convertibles closed the day at 246 versus a Schering-Plough (NYSE: SGP) closing stock price of $27.26.

The stock slipped 26 cents, or 0.94%, on the day.

"From what I'm hearing, people got very big allocations," an analyst added. "We didn't see many bids, but there were many offers. I think the underwriter had to get in there to stabilize things."

Misread report rattles Countrywide

With the mortgage market already in rough shape and investors on the lookout for the next shoe to drop - Atlanta-based mortgage lender HomeBanc Corp. filed for Chapter 11 bankruptcy Friday - the last thing any home lender needed was a misread report to scare jumpy investors.

That's exactly what happened to Countrywide Friday.

In an SEC filing late Thursday, America's largest home lender said that it had enough funding liquidity but that "the situation is rapidly evolving and the impact on the company is unknown."

That sent stock in Calabasas, Calif.-based Countrywide tumbling as much as 13.7%, and analysts said the company's bonds plummeted as well.

But the announcement was similar to a filing last week, which occurred on a stronger market day. "I didn't get the feeling that it had become any more problematic than a week or so ago," an analyst said. "I think it's gotta be taken in context with everything else that's going on in a given day. I'm not sure that we really learned a lot."

Another analyst added that it was a case of the mainstream media blowing a report out of proportion.

By the end of the day, investors got to the heart of what was really going on at Countrywide. The stock (NYSE: CFC) rallied but still closed down 80 cents, or 2.79%, closing at $27.86.

The company's Libor plus 350 basis points series A convertible senior debentures due April 2037 rallied to finish at around 90.5 versus a stock price of $27.86.

The series B Libor plus 225 bps series B convertible senior debentures due May 2037 rallied to finish at around 88 versus a $27.86 stock price.

Both tranches of the Countrywide convertible were down on the day, however.

Secondary action

In secondary action, Medtronic's 1.5% convertible senior notes due 2011 finished the week at 107.13 versus a closing stock price of $53.06. The Minneapolis-based medical device maker saw its convertibles finish at 107.25 versus a $53.44 stock price on Thursday.

Medtronic stock (NYSE: MDT) lost 38 cents, or 0.71%, on Friday.

Wyeth's Libor plus 50 bps convertible senior floating-rate notes due 2024 finished Friday at 106.5 versus a closing stock price of $46.59. They finished Thursday at 107.125 versus a $49.58 share price.

Stock in the Madison, N.J.-based pharmaceuticals firm (NYSE: WYE) dropped $2.99, or 6.03%, on Friday.

Wells Fargo's Libor plus 25 bps convertible senior floaters were active Friday but ended the day where they started. The convertibles finished the day at 99.75 versus a stock price of $34.40. They finished Thursday at 99.75 versus a $34.16 share price.

The San Francisco-based bank saw its stock (NYSE: WFC) rise 24 cents, or 0.70%, Friday. Wells Fargo is the second-largest mortgage lender, but didn't lend in the riskier subprime sector. It also has a range of other products to balance out mortgage risks, analysts said.

Chevy Chase, Md.-based small- and mid-sized business lender CapitalSource continued its downward trend.

The company's 7.25% senior subordinated convertible notes due 2037 finished Friday at 84.38 versus a closing stock price of $18.51. They finished Thursday at 87 versus a $19.55 stock price.

CapitalSource stock (NYSE: CSE) closed $1.04, or 5.32%, lower.

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