From the Securities Lending Trading Desk

US high yield bond total returns have seen their best results as of late, causing easing in short demand. China Evergrande Group, China’s second largest real estate developer surprised investors last week with better than expected positive earnings guidance. In Europe, Pandora issued a profit warning which sent shares in the jewelry-maker lower.

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

Put mildly, Tesla has had a turbulent few weeks. Most recently, Elon Musk tweeted that he is “considering taking Tesla private at $420. Funding Secured.” The Board of Directors has not commented on his tweet and the SEC is now looking into the authenticity of Musk’s claim about funding. Prior to this, Musk directed public criticism at a diver involved in the Thai cave rescue. Reports then surfaced that Tesla had asked some of its suppliers for refunds in order to appear profitable heading into their Q2 earnings call. On the Q2 earnings call last week, Musk then apologized for his past bad behavior and offered a promising outlook for the remainder of the year in terms of production, margin increases, and cost cutting measures. The stock price subsequently jumped 11%. Meanwhile, bulls and bears in the lending market have stayed put as both still believe their position is the right one. Despite the public volatility in the news cycle, borrowers seem mostly to be in a tense wait-and-see holding pattern. Demand remains steady with refinancing requests in both directions.

High yield bond total returns have seen their best results as of late, causing easing in short demand. Specifically, the SPDR Bloomberg Barclays High Yield Bond ETF has seen a gradual decline in lending fees during the summer as short covers have increased during redemption cycles. Fixed income investors have had a rough year thus far, as almost every outlet seems to lose them money. However, high yield debt has been a welcome exception as the Bloomberg Barclays High Yield Bond Index has grown 1.2% while other indices are down. Short demand has slowly dried up while supply has remained steady. As lenders continue to offer relief to keep their supply out, lending levels continue to drop.

Asia Pacific

China’s second largest real estate developer by sales surprised investors last week with better than expected positive earnings guidance. China Evergrande Group said it expects first-half core profit to more than double from a year ago, sending its shares soaring by as much as 21% in trading last Tuesday. China Evergrande is currently the fourth most shorted stock in Hong Kong, with short interest at 20% of its free float, and its sharp gains last week resulted in approximately $220 million in bearish bets being wiped out. We have seen strong securities lending demand for China Evergrande in recent months, which has seen its share price increase by a staggering 420% since the beginning of 2017.

The world’s largest initial public offering in two years took place in Hong Kong last week and avoided the fate of smartphone manufacturer Xiaomi Corp, which disappointed on its own debut last month. China Tower Corp, a state-run company that builds and runs 1.9 million cell towers, raised $6.9 billion from its offering and largely traded flat on its opening day. This was a better than expected outcome considering the current market conditions as investors have remained cautious for IPOs in Hong Kong in recent weeks given the escalation in the China-US trade war and tightening liquidity conditions in the city. We saw limited securities lending demand for shares of China Tower last week.

Europe

As earnings news dominate headlines, Pandora issued a profit warning which sent another CEO packing and shares in the jewelry-maker lower. Shareholders in Pandora were shocked last Monday when the firm issued a profit warning which led to it losing almost a quarter of its market value. The news led to the board asking CEO Andres Friis to step down after three and half years in charge, a relatively long tenure for a firm that had gone through four previous CEO’s since listing in 2010. Mr Friis had introduced a strategy in January for the firm to target growth in sales of 7-10 percent and a profit margin of about 35 percent. Monday highlighted a growth of 4-7 percent and a margin of 32 percent. Short Interest in the stock rose from 7.7% to 9% (Markit), its largest increase since the beginning of June.

Takeover news continues to drive demand as Clydesdale Bank remains popular with borrowers who aim to increase their short positions. Short interest in the bank remains high at 10.6% of outstanding shares following confirmation of an approved £1.7Bn takeover of Virgin Money. On the high street, Mike Ashley today confirmed the £90Mn purchase of House of Fraser following news that the prior takeover bid had collapsed.