Borrowers are seeking shares of cloud- and security-related names in the US while activity in Asia continues to focus on depressed tourist spending in Hong Kong. Convertible bond deals and rights issues are driving European demand.
Below please find the June 16 edition of From the Trading Desk, which provides timely commentary about top security earners, revenue drivers and other factors influencing the securities lending market from the BBH Securities Lending Trading Team.
Late last week, it was reported that 4 million U.S. federal workers’ personal information had been compromised, putting cloud- and security-related names in focus across the market. The news sent share prices for stocks in the cloud sector higher, including KEYW Holding Corp., CyberArk Software and VASCO Data Security International. Volatility in these sectors has pushed lending fees higher as well.
In related news, there is strong demand for Box, the online file sharing and personal cloud content management service. The share price rallied following a first-quarter loss that was smaller than analysts expected and a boost to the revenue forecast for the year. A significant share lock-up is due to expire on July 22. Strong fundamental demand, combined with limited liquidity in the market, is driving fees higher.
We saw firm broker demand for POZEN, a U.S. specialty drug company, following news that the company plans to acquire Tribute Pharmaceuticals, a Canadian specialty pharmaceutical firm, for $146mm in stock. The transaction is expected to close in Q4. The newly formed company will be re-named Aralez Pharmaceuticals and be domiciled in Ireland. Pozen’s business model is unique in that the firm generates revenue predominantly from product royalties and license payments.
The convergence trade has become a divergence trade as Shanghai-listed stocks rally. Dually listed stocks in Hong Kong and China have defied expectations that the Hong Kong-Shanghai exchange link would eliminate valuation gaps between the two markets. The mainland premium on dual-listed shares has surged to an average of 113% from 30% a year ago. Difficult to short A-shares and the Shanghai composite’s 58% surge YTD vs. Hang Seng’s 14% increase have caused arbitrageurs to suffer losses.
Continued weakness in visitor spending and a slowdown in mainland tourist arrivals is harming Hong Kong retail profits. A combination of China’s austerity drive, travel restrictions between Shenzhen and Hong Kong, plus an increase in mainland Chinese tourism to alternative destinations such as Japan and Korea have led to a reduction in luxury spending. We are seeing strong demand to borrow Chow Tai Fook Jewellery Group after its earnings missed analyst estimates last week.
Borrowers are seeking shares connected to convertible bonds offerings. Strong demand was seen for Salzgitter after the firm announced a $191 million deal. Neopost was also in focus following news that the firm will sell as much as $338 million to increase the company’s average debt maturity as well as fund external growth projects.
Arbitrage opportunities between ordinary shares and rights issues are driving borrower demand for Italian banks. Banca Monte de Paschi Siena and Banca Carige raised $3.3bn and $959mn respectively, via rights issuances to strengthen capital ratios. Borrower demand has centered on ordinary shares that are trading at a premium to the rights. Spreads for both names have been volatile, particularly in the last day of rights trading for Monte Paschi.