From the Securities Lending Trading Desk

Borrowers are seeking shares of Macau’s main casino operators, which continue to underperform due to a decrease in tourism from China.  Reduced spending in Asia has also increased demand for European luxury retailers.  In the US, we highlight two M&A deals of note.

Below please find the August 25 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

Americas

M&A activity continues to be a significant driver of demand in the US. Two deals of note were announced last week. Brookfield Asset Management, Canada’s largest alternative asset manager, agreed to acquire Australian rail and port operator Asciano. Brookfield made the cash and stock offer via its publically traded subsidiary, Brookfield Infrastructure Partners. Immediately after the deal was announced, we saw an uptick in demand and shares were allocated to borrowers. Separately, Liberty Interactive, owner of the QVC television shopping network, announced plans to acquire Zulily, also for cash and stock. Zulily has been in demand for some time, however the announcement caused the share price to jump prompting many bearish investors to close out their positions in an effort to limit losses.

Directional demand remains strong as hedge funds increase bearish positions. Short positions exceeded bullish ones by 22 percentage points, their most pessimistic stance since January 2009, according to a report from Credit Suisse. The desk has seen strong directional demand for Laredo Petroleum, an independent oil and gas company. Laredo’s share price has rallied 28% since falling to a six month low of $7.79 on August 5. Investors are questioning whether recent price gains are truly warranted given concerns over significant oil production, the economic situation in China and, specifically, Laredo’s dependency on oil prices. Other names in focus include Seadrill, the Greenbrier Companies, and LifeLock, all of which have fallen to lows in recent days.

Asia Pacific

Shares of Macau’s main casino operators continue to underperform as lower visitor numbers from China compress earnings. July’s reported gambling sector revenue was $2.3 billion, the second lowest level of monthly revenue since 2011. Earnings are expected to remain under further strain in light of the recent devaluation of the yuan and a prolonged anti-graft campaign in China. As a result, we have witnessed increased securities lending interest for shares of Galaxy Entertainment, MGM China, Sands China and Wynn Macau.

Profit margins in Chinese coal companies are expected to be squeezed for the foreseeable future as the operating environment for producers remains challenging. Prolonged weakness in both sales volumes and average sales prices as a result of a slowdown in the Chinese economy, coupled with the recent weakening of the yuan, is likely to negatively impact earnings. In recent weeks we have witnessed increased securities lending demand for China Coal Energy and Yanzhou Coal Mining.

Europe

Short sellers are targeting luxury stocks across Europe amid weaker demand from Asia and currency fluctuations. Markit reported $8 billion in short bets across the 25 most shorted luxury and apparel retailers as average short interest in the sector rose to 3.9% of shares outstanding. Tod’s, Puma, and Hermes have all seen an increase in borrower demand.

The Bloomberg Commodity Index sank to its lowest level since 1999 causing shares in natural resource companies to join the global equity slump. Shares in miners and explorers including Glencore, BHP Billiton and Cnooc, tumbled, while Brent crude fell below $45 a barrel for the first time since 2009. The securities lending desk has continued to see demand for less diversified miners such as Lonmin and Vedanta. Further, utilization in the oil services sector remains strong.

Abengoa may increase the value of its planned rights issue while the company’s executives are coming under fire. Abengoa has been one of the most sought after names in Europe this week following an announcement that the company is considering a larger capital increase than previously expected – potentially €800 million. This coincided with a complaint that alleges that former and current executive officers and directors have misrepresented the liquidity of their balance sheet.