From the Securities Lending Trading Desk

Close up of examining of test sample under the microscope

Securities lending demand has been driven by IPOs, mergers and rights issues. In the US, biotech IPOs are seeing interest from borrowers.

Last week, Fujifilm Holdings Corp shares rose sharply after Xerox Corp announced it will merge with the company’s Asian joint venture in a deal worth USD $18 billion and Danish telecoms operator TDC announced a takeover of Swedish Modern Times Group’s broadcasting and entertainment business.

Meanwhile rights issues are driving demand for the UK’s Capita PLC, Swedish firm D.Carneige and Co AB and UK based Cineworld.

Below please find this week’s 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

2018 has been active for IPOs, specifically Biotech within the biotech sector, with 5 companies going public last week and more than 14 companies recently filing for IPOs. Last week there was strong market demand for Menlo Therapeutics Inc. (MNLO) after the company went public with 7 million shares. The shares were priced at $17.00 and the price quickly shot up to $36.80, more than doubling in its first few days of trading. The bio-pharmaceutical company develops medicines and therapies for the treatment of chronic pruritus and cough. Investor enthusiasm for this market segment is strong amid successful developments in treatments and several FDA approvals. Also driving demand in this sector is increased M&A activity due to favorable business tax packages that allow companies to repatriate overseas cash for mergers and acquisitions locally. We saw this in January when Sanofi and Celgene Corp. announced mega mergers. While some investors are looking for the next IPO to be scooped up by larger biotech companies given the favorable environment, others question if the spike in market value of these IPOs is due to optimism and speculation with regard to M&A activity.

Following on the IPO theme, we are seeing strong demand for Qudian Inc. (QD) which went public in October. The inital share price of QD was $24.00. It spiked to $34.90 in the first week of trading and has since been unable to maintain their IPO price, trading between $12-$14 per share in January. Qudian provides online credit products to customers in China. QD is facing headwinds amid speculation that China’s online loan market will be greatly affected by new regulatory curbs on funding and pricing. According to Bloomberg, “regulatory curbs released in December limit the use of asset-backed securities, and constrain online lenders’ ability to source funding from financial institutions. Regulators are likely to strictly enforce the 36% price ceiling for internet loans, and noncompliant lenders risk losing their licenses.” QD has become a top earning stock as fee levels climb due to increased bearish sentiment as the company battles headwinds and investors weigh uncertainties for the newly public company.

Asia Pacific

China’s largest real estate developer is raising $2.9 billion to refinance debts. China Evergrande Group’s share price experienced a surge in 2017 as the heavily indebted developer pledged to reduce its leverage along with an 832% jump in first half earnings. The developer is currently carrying a debt to equity ratio of 240%, and is aiming to reduce the net debt by 30% from the fundraising. The convertible perpetual securities are indicated at 3-4% per year. Evergrande plans to use the proceeds for refinancing existing debts and general corporate purposes. We witnessed strong securities demand for shares of Evergrande last week.

Fujifilm Holdings Corp shares rose sharply after Xerox Corp announced it will merge with the company’s Asian joint venture in a deal worth USD $18 billion. When the deal completes, Fujifilm Holdings Corp will own more than 50% of the combined entity which encompasses all of Xerox’s operations. The combined companies should be able to operate as a global document business and, according to analysts, will reap significant synergies. We saw muted securities lending demand for Fujifilm following the announcement.

Europe

Mergers and acquisitions continue to drive securities lending demand. This week, Danish telecoms operator TDC watched their share price tumble after announcing a $2.5 billion takeover of Swedish Modern Times Group’s broadcasting and entertainment business. The cash and share deal, would give TDC 3 million TV subscribers and access to 10 million households in the Nordic region, the Danish company said. The deal would also allow TDC to offer a full package of fixed line and mobile telephone services, broadband internet access, TV distribution and streaming services in Denmark and Norway. Analysts, however, said TDC was paying a steep price for the assets.

Last week, borrowers sought shares in a number of newly announced rights offerings. Capita PLC in the UK announced it was suspending its dividend for the year while also announcing a GBP 700 million rights issue as the firm looks to cut costs and rebuild the company. On a more positive note, Swedish firm D.Carneige and Co AB confirmed an EGM will be held on February 23 to propose a SEK1.5 billion rights issue to finance the expansion in its current property portfolio. Securities lending interest has also been strong for UK based Cineworld ahead of next week’s trading period. The rights issue is being used to fund the purchase of Regal Entertainment Group, as the firm look to raise GBP 1.7 billion.