Convertibles mixed in thin volume; Schering-Plough falls, Bank of America firmer; Merrill trades; Lehman to price

By Rebecca Melvin

New York, March 31 - The convertible bond market was mixed in thin trade on Monday, with some names notably lower, such as Schering-Plough Corp. on negative news about its Vytorin cholesterol drug, while some financials, like Bank of America Corp., were stronger, market players said.

The convertibles of Merrill Lynch & Co. also traded, which in itself was notable on a day when activity was extremely thin, a buyside trader said.

"It was very, very slow. The normal things are trading, but in much smaller quantities. About 20 million Merrills traded, and that was about the only name where more than 10 million to 15 million traded."

There was continued "jittery-ness over the credit markets," a New York-based sellsider trader said, adding that it was a positive sign that equity markets rallied toward the end of the day as a proposed regulatory overhaul of the financial system seemed to gain resigned acceptance.

"It could have been worse from a restriction standpoint if there were a lot of specifics," the sellsider said of the regulatory framework unveiled early Monday by Treasury Secretary Henry Paulson.

Other traders said the Yankees baseball team, which was scheduled to play its first game of the season, was the real focus of the day.

Normally trading on the last day of the quarter would result in some "rounding out, selling, or cleaning up of positions," but there was little evidence of that on Monday, traders said.

Schering-Plough sinks hard

Schering-Plough's 6% mandatory convertible preferred stock closed Monday at 153.25 versus a closing stock price of $14.41, compared to 192.3 versus a closing stock price of $19.47 on Friday.

The convertible preferreds were not heavily traded compared to trading of the common shares of the Kenilworth, N.J.-based drug maker.

The common shares (NYSE: SGP) plunged 26% in extremely heavy volume after its cholesterol drug Vytorin, produced in conjunction with Merck, was held up as an example of treatment not to use at a meeting of the American College of Cardiology in Chicago over the weekend.

The preferred shares were down about 1.5 points or more, a trader said, pointing out that not a lot of Schering-Plough convertible preferreds traded. Trading in other pharmaceutical names in convertibles wasn't stimulated by the action in Schering-Plough, the trader said.

Bank of America, WaMu firmer; Merrill steady

The 7.25% perpetual convertible preferreds of Bank of America closed up at 1040.97 versus a stock price of $37.91 on Monday, compared to a close of 1030 versus a stock price of $38.07 on Friday.

Charlotte, N.C.-based Bank of America's shares (NYSE: BAC) closed down 16 cents, or a little less than half a percentage point.

In addition, Seattle-based savings and loan Washington Mutual saw its 7.75% series R non-cumulative perpetual convertible preferred stock close Monday at 706 versus a closing stock price of $10.30. They closed Friday at 695 versus a closing stock price of $10.12.

A sellside trader commented on Monday that he believes convertibles will outperform equities in the coming months because, while credit has already been beaten up and will hopefully stabilize, volatility is likely to continue.

Merrill Lynch's 0% convertibles closed little changed at 106.2, versus a share price of $40.74, compared to a close of 106.4 on Friday, versus a share price of $39.93

Options of Lehman Brothers Holdings and Merrill Lynch were trading heavily on Friday amid speculation about the future prospects for the two investment banks given recent credit woes. Earlier this month, Merrill amended the terms of its convertible Exchange Liquid Yield Option Notes due 2032 to increase the conversion rate to 16.5 from 14.0915 and to add Sept. 13, 2010 and March 13, 2014 as additional put dates.

Lehman to price $3 billion of convertibles

After the close of a day of relative inactivity, convertibles players got a jolt when Lehman Brothers announced that it plans to price $3 billion of perpetual convertible preferred stock, or 3 million shares at $1,000 per share liquidation preference, before the market opens on Tuesday.

New York-based Lehman Brothers Inc. is book-running manager of the offering, which is being made under Lehman Brothers Holdings' existing shelf registration statement.

The shares were talked to yield 7% to 7.5%, with an initial conversion premium of 30% to 35%. They are non-callable for five years and have mandatory conversion after five years, subject to a 130% hurdle.

Upon conversion, the preferred stock will be convertible into shares of Lehman Brothers' common stock, plus cash in lieu of fractional shares.

They have standard dividend and takeover protection and net-share settlement.

Proceeds will be used to bolster the firm's capital and increase financial flexibility, according to a company release.

Shares of Lehman (NYSE: LEH) closed down 23 cents, or 0.61%, at $37.64.

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