Schering-Plough set to launch; Horizon fails to excite; Beazer Homes, CapitalSource rebound

By Evan Weinberger

New York, Aug. 2 - Schering-Plough Corp. and Horizon Lines Inc. made the biggest splashes in the convertibles market Thursday.

Schering-Plough set a pricing date for more than $2 billion in mandatory convertible preferred stock. Horizon Lines, meanwhile, priced its convertible senior notes overnight, and the pricing was along the lines of what investors wanted to hear.

Meanwhile, several convertibles that had been hurt by spreading fears in the subprime mortgage sector managed a bit of a rebound. Convertibles issued by Beazer Homes USA Inc. and CapitalSource Inc. both saw gains over the course of Wednesday as their common stocks rebounded.

Mixed news on jobs and some solid company earnings helped solidify Wall Street Thursday. Stock indexes closed higher for the second consecutive day, including another rally in the last half hour or so.

The Dow Jones Industrial Average gained 100.96 points, or 0.76%, to close at 13,463.33. The Nasdaq picked up 22.11 points, or 0.87%, finishing the day at 2,575.98.

Horizon Lines doesn't excite

Horizon Lines $300 million in convertible senior notes came in cheaper than talk, which was just what investors, traders and analysts were urging.

The notes came in at a 4.25% coupon and a 30% initial conversion premium. Talk had been for a 3.5% to 4% coupon with a 30% to 35% initial conversion premium.

The Charlotte, N.C.-based shipping company plans to use the proceeds as part of a refinancing of existing debt.

"I haven't heard any talk about it," one analyst said. "I really just think that that's not shaking up the market."

A trader, who also said he saw no trades in the Horizon Lines convertibles, which were issued at par, speculated that the bonds may have been bought up quickly when they were issued.

"You just never see it on the secondary," he said.

Horizon Lines stock (NYSE: HRZ) picked up 19 cents, or 0.67%, Thursday, closing at $28.75.

Beazer, CapitalSource come back

Just a day after fending off bankruptcy rumors, Beazer Homes hit the comeback trail Thursday.

The company regained some investor confidence when Chicago-based hedge fund Citadel Investment Group LLC announced that it had increased its stake in the Atlanta-based homebuilder to 5.7%.

Beazer's 4.625% convertible senior notes due 2024 finished trading Thursday at 76.50 versus a closing stock price of $13.04. They finished Wednesday at 75 versus $11.48.

Beazer Homes stock picked up $1.56, or 13.59%, on the day.

CapitalSource also saw gains on its convertibles and common stock Thursday. The Chevy Chase, Md.-based lender to small and medium-sized businesses had been caught up in general subprime panic.

All three of the company's convertibles traded higher Thursday.

The 7.25% convertible notes soared, closing at Thursday at 90.5746 versus a closing stock price of $19.83. They closed Wednesday at 84.26 versus $19.07.

The 3.5% convertible senior unsecured notes due 2034 recovered from losses early in the day to close at 98.392 versus $19.83. They closed Wednesday at 97.0798 versus $19.07.

CapitalSource's 1.25% senior notes due 2034 also made a big jump, closing at just over 97 versus $19.83. They finished Wednesday at 91.38 versus $19.07.

CapitalSource stock (NYSE: CSE) moved up 3.99%, or 76 cents, on the day.

Bargain hunters looking for value fueled the rise, according to one trader. The increased investor interest in Beazer Homes and other companies also tagged in the subprime mortgage crisis also suggests that some people feel the concerns about the contagion spreading may be overblown.

"A lot of people are saying these are at prices that we want to own," he said. "But on the other hand, American Home Mortgage Investment Corp., Radian Group Inc. vomited.

"Some of these things are way overdone. There'll probably be a lot of mergers as a result, which is what converts holders have to look out for."

Accredited Home Lenders plummeted nearly 50% at one point on news that the company may go out of business if conditions don't improve fast. The San Diego-based mortgage lender announced in a late Securities and Exchange Commission filing that increasing margin calls and adverse conditions were pushing the company ever lower.

"We cannot assure you that we will continue to operate as a going concern," the company said in the 10-K filing. "The industry experienced a period of turmoil which has continued into the second quarter."

Accredited Home Lenders is also being hurt by worries that its $400 million buyout by private equity firm Lone Star won't happen. "LEND, people don't think the deal is going to get done," a market source said.

By the end of the day, Accredited Home Lenders (Nasdaq: LEND) had lost $2.90, or 35.32%, closing at $5.31.

Schering-Plough set to launch

Schering-Plough, the Kenilworth, N.J.-based pharmaceuticals firm, announced the launch of $2.5 billion in mandatory convertible preferred stock Thursday.

The convertibles offering, which will be sold as 10 million shares with a $250 per-share liquidation preference, will be issued at the same time as a 50 million share offering of Schering-Plough common stock. There is a 1.5 million share greenshoe on the convertibles and a 7.5 million share greenshoe on the common stock.

The company says the proceeds will form part of the funding for its acquisition of Organon BioSciences N.V., which was announced in March and is scheduled to close by the end of 2007. If that deal doesn't go through, the proceeds will go toward general corporate purposes.

"People will pay attention to it," one analyst said.

Mandatories sold simultaneously with common stock usually perform well, the source said.

"It means that the underwriters are going to be out there supporting the stock when this thing prices," he added. "The fact that the underwriter's going to be out there supporting the common really stabilizes the convert."

Schering-Plough stock (NYSE: SGP) lost 13 cents, or 0.44%, Thursday, closing at $29.25.

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