SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FEBRUARY 18, 2004
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Date of Report (Date of Earliest Event Reported)
SCHERING-PLOUGH CORPORATION
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(Exact name of registrant as specified in its charter)
NEW JERSEY 1-6571 22-1918501
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(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification Number)
2000 GALLOPING HILL ROAD
KENILWORTH, NJ 07033
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(Address of principal executive offices, including Zip Code)
(908) 298-4000
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(Registrant's telephone number, including area code)
ITEM 5. OTHER EVENTS AND REGULATION FD DISCLOSURE
S&P Downgrade
On February 18, 2004 Standard & Poor's (S&P):
1. lowered Schering-Plough's corporate credit and long-term debt ratings to "A-"
from "A,"
2. lowered its ratings on Schering-Plough's credit and commercial paper to "A-2"
from "A-1,"
3. said the outlook on the ratings is negative, and
4. removed Schering-Plough's ratings from CreditWatch.
The S&P press release contains much other information that may be of interest to
investors. That press release is attached to this 8-K as Exhibit 99.1.
Other Credit Ratings
In understanding the impact of the S&P downgrade, it is helpful to consider the
credit ratings and recent credit rating actions of Moody's Investors Service
(Moody's) and FitchRatings Service (Fitch), the other ratings agencies that rate
Schering-Plough securities.
On October 9, 2003, Moody's lowered Schering-Plough's corporate credit rating to
"A-3" from "A-1" and lowered its commercial paper rating to "P-2" from "P-1."
Following this rating action, Moody's removed Schering-Plough from its Watchlist
and revised its rating outlook to stable from negative. Moody's also stated that
its credit rating assumed modest outflows to settle outstanding litigation or
acquisitions and that a very large payment associated with litigation
proceedings or acquisition activity could place pressure on the rating and/or
outlook.
On November 20, 2003, Fitch downgraded Schering-Plough's senior unsecured and
bank loan ratings to "A-" from "A+," and its commercial paper rating to "F2"
from "F1." Schering-Plough's Rating Outlook remained negative. In announcing the
downgrade, Fitch noted that the sales decline in Schering-Plough's leading
product franchise, the INTRON franchise, was greater than anticipated, and that
it was concerned that total company growth is reliant on the performance of two
key growth drivers, ZETIA and REMICADE, in the near term.
Long-Term Borrowing with Step Up Provisions Tied to Credit Ratings
On November 26, 2003, the Company issued $1.25 billion aggregate principal
amount of 5.3 percent senior unsecured notes due 2013 and $1.15 billion
aggregate principal amount of 6.5 percent senior unsecured notes due 2033.
Proceeds from this offering of $2.4 billion are being used for general corporate
purposes, including to repay commercial paper outstanding in the United States.
Upon issuance, the notes were rated A3 by Moody's Investors' Service (Moody's)
and A+ (on CreditWatch with negative implications) by S&P. The interest rates
payable on the notes are subject to adjustment. If the rating assigned to the
notes by either Moody's or S&P is downgraded below "A3" or "A-," respectively,
the interest rate payable on that series of notes will increase.
The February 18, 2004 S&P downgrade action and Moody's current rating does not
trigger the credit rating step up provisions, so there will be no adjustment to
the interest rate as a result of S&P's downgrade.
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Other Financial Arrangements Containing Credit Rating Downgrade Triggers
Schering-Plough has two separate arrangements that enable it to manage cash
flows between its U.S. subsidiaries and its foreign-based subsidiaries. Both of
these arrangements employ interest rate swaps and both of these arrangements
have similar credit rating downgrade triggers which allow the counterparty to
call for early termination. The credit rating downgrade triggers require
Schering-Plough to maintain a long-term debt rating of at least "A2" by Moody's
or "A" by S&P. Both S&P's and Moody's current credit ratings are now below this
specified minimum. As a result, the counterparties to the interest rate swaps
can call for early termination following a specified period as previously
disclosed.
One of the arrangements utilizes two long-term interest rate swap contracts, one
between a foreign-based subsidiary and a bank and the other between a U.S.
subsidiary and the same bank. The two contracts have equal and offsetting terms
and are covered by a master netting arrangement. The contract involving the
foreign-based subsidiary permits the subsidiary to prepay a portion of its
future obligation to the bank, and the contract involving the U.S. subsidiary
permits the bank to prepay a portion of its future obligation to the U.S.
subsidiary. Interest is paid on the prepaid balances by both parties at market
rates. Prepayments totaling $1.9 billion have been made under both contracts as
of December 31, 2003. The prepaid amounts have been netted in the preparation of
the consolidated balance sheet in accordance with Financial Accounting Standards
Board (FASB) Interpretation No. 39, "Offsetting of Amounts Related to Certain
Contracts."
This arrangement provides that in the event Schering-Plough fails to maintain
the required minimum credit ratings, the counterparty may terminate the
transaction by designating an early termination date not earlier than 36 months
following the date of such notice to terminate. However, if such notice is
given, the early termination consequences discussed below would occur at the end
of the three-year period.
Early termination requires repayment of all prepaid amounts, and repayment must
occur in the original tax jurisdiction in which the prepaid amounts were made.
Accordingly, early termination would require Schering-Plough's U.S. subsidiary
to repay $1.9 billion to the bank and for the bank to repay $1.9 billion to
Schering-Plough's foreign-based subsidiary.
The financial impact of early termination depends on the manner and extent to
which Schering-Plough decides to finance its U.S. repayment obligation.
Schering-Plough could finance its entire obligation by obtaining short- or
long-term financing in the United States. (In this case, cash and debt would
increase by equal amounts in the consolidated balance sheet.) However,
Schering-Plough's ability to finance its obligation under the swaps will depend
on Schering-Plough's credit ratings and business operations, as well as market
conditions, at the time such financing is contemplated. Alternatively,
Schering-Plough could repatriate to the United States some or all of the funds
received by the foreign-based subsidiary. Repatriating funds could have U.S.
income tax consequences depending primarily on profitability of the U.S.
operations. Any such tax would be accrued against future earnings, and may
result in Schering-Plough reporting a higher effective tax rate. Currently, the
U.S. operations are generating tax losses. However, future tax losses may be
insufficient to absorb any or all of the potential tax should Schering-Plough
repatriate some or all of the funds received by the foreign-based subsidiary.
As stated above, termination of the transaction cannot occur earlier than 36
months following the date on which Schering-Plough receives a termination notice
from the counterparty. Accordingly, early termination is not imminent. Due to
this fact, as well as the alternative
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courses of action available to Schering-Plough in the event of early
termination, the potential of early termination does not impact current
liquidity and financial resources.
The second arrangement utilizes long-term interest rate swap contracts, one
entered into in 1991 with a notional principal of $650 million and a second
entered into in 1992 with a notional principal of $950 million. The terms of
these contracts enable Schering-Plough to sell the right to receive payments
while retaining the obligation to make payments. In 1991 and 1992, the U.S.
parent company sold the rights to receive payments under both contracts to a
foreign-based subsidiary in return for approximately $700 million (estimated
fair market value at the time).
The contracts allow the counterparty to effectively terminate the transaction if
Schering-Plough fails to maintain the required minimum credit ratings and within
60 days does not restore at least one of the required minimum credit ratings.
Schering-Plough's credit rating fell below the required minimum credit rating on
February 18, 2004. It is unlikely Schering-Plough will restore at least one of
its credit ratings in the allotted time. Early termination of these contracts
due to a credit rating downgrade would most likely result in the U.S. parent
company reacquiring the right to receive payments from its foreign-based
subsidiary and terminating the transaction with the counterparty on a net basis.
The reacquisition of the rights to receive payments under the swap contracts
would occur either by the U.S. parent company buying back the rights for their
fair market value or by having the foreign-based subsidiary dividend the rights
back to the U.S. parent company. Buying back the right would necessitate funding
in the United States, which Schering-Plough currently estimates would be
approximately $450 million, which amounts would be transferred to the
foreign-based subsidiary. In this case, cash and debt would increase by equal
amounts in the consolidated balance sheet. Alternatively, having the
foreign-based subsidiary dividend the rights back to the U.S. parent company
could result in additional U.S. income taxes.
Presently, the U.S. operations of Schering-Plough are generating tax losses.
These losses are expected to exceed the value of the intercompany dividend
necessary to reacquire the rights. As a result, in the event of early
termination, management has the alternative of reacquiring the rights and
terminating the transaction with the counterparty without materially impacting
liquidity or financial resources. Accordingly, management does not view early
termination of this arrangement to be a material event impacting current
liquidity and financial resources.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits. The following exhibit is filed with this 8-K:
99.1 Release issued by Standard & Poor's concerning Schering-Plough February 18,
2004
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Schering-Plough Corporation
By /s/ Thomas H. Kelly
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Thomas H. Kelly
Vice President and Controller
Date: February 18, 2004
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EXHIBIT INDEX
The following exhibit is filed with this 8-K:
99.1 Release issued by Standard & Poor's concerning Schering-Plough February 18,
2004
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