Schering-Plough Corp.'s 5.30% notes of '13 started last Wednesday at 95 basis points over 10-year Treasuries and widened to 100bps after Moody's Investors Service downgraded Schering's credit ratings from A3 to Baa1. The downgrade triggered an uncommon step-up clause that called for the coupon to increase 25bps to 5.55%. Schering will pay an additional $3.125 million to bondholders on Dec. 1 when it makes its next semiannual coupon payment on the $1.25 billion investment-grade offering of '13s it sold last year. A call to Robert Bertolini, executive v.p. and cfo in Kenilworth, N.J., was returned by Steve Galpin, spokesman. He declined comment.
The downgrade was noteworthy in an otherwise quiet week because step-ups are infrequently triggered. Furthermore, that the downgrade occurred shortly after Schering made its June 1 payment left at least one sell-side analyst questioning the timing of the rating agency's action. "There hasn't been much happening," he said, referring to an impetus for the downgrade. He speculated that Moody's may have waited to downgrade the company until after the payment was made. Yet Michael Levesque, analyst at Moody's, countered that Schering's downgrade was prompted by its continued weak and declining market share. He added the rating agency takes 60 to 90 days once a credit is placed on watch to either take it off watch or change its ratings and Schering was approaching the end of that window.