From the Securities Lending Trading Desk

In the US, overall analyst estimates have been trending lower on Hi-Crush Partners LP (HCLP) after the huge share price rally in late July. Earlier this month, the Nikkei newspaper reported that Tateru falsified documents when applying for loans at a local bank and made the accounts appear to be larger than they actually were. The reported deal between Hurricane Energy and Spirit Energy strengthens plans associated with the drilling of new wells west of the Shetland islands following a recent wave of activity in the North Sea region.

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

Bilibili Inc. (BILI) a provider of online entertainment services to customers in China, has been an increased focus of demand after the share price peaked in mid-June. While bulls are focused on the company’s impressive top-line growth and improving gross margin, bears are concerned with diversification of demand on their offerings. Despite plans to expand their offerings to live video streaming, music and advertising, BILI is currently very reliant on one popular Generation Z game in particular. Last week the share price started surging again after the company posted impressive second quarter results. BILI went public in March and while the share price rallied to a high of $21.25, they have been unable to sustain that valuation. Recent share price volatility has sparked increased demand.

There has been an increased focus on Hi-Crush Partners LP (HCLP) recently as the share price has been extremely volatile. Much of this volatility comes amid varying headlines regarding frac sand stocks from delays in production to a glut of supply and diminishing demand. Despite reporting improved second quarter results, HCLP missed expectations. Their net income of $0.67/share fell short of some estimates of $0.77/share. While, revenues were 83.8% YOY to $248.5mm, they narrowly missed the $248.7mm estimate. Overall analyst estimates have been trending lower on HCLP after the huge share price rally in late July. Much of those gains followed news that HCLP is acquiring a sand logistics company, which is expected to support the addition of a new mine and result in increased distribution. There were also talks of changing the company’s status as a master limited trust to a “more conventional” C corp. While uncertainty and volatility both remain high, we continue to see strong fundamental demand.

Asia Pacific

Japanese real estate brokerage and management service firm Tateru Inc has become embroiled in a falsification of data scandal, sending its share price into a tailspin. Earlier this month, the Nikkei newspaper reported that Tateru falsified documents when applying for loans at a local bank and made the accounts appear to be larger than they actually were. Executives at Tateru have since admitted that its employees carried out these malpractices to process the screening of loans in an expedited manner. Although the company has since apologized to customers and offered compensation, investors have taken a negative view on the company which is also under increased scrutiny for its financial reporting. We have seen strong securities lending demand for Tateru in recent weeks, which has seen its shares decline by over 65% since the beginning of September.

Japan’s largest messaging service provider announced last week that it would raise capital to fund an ambitious plan to expand its product offering. Line Corp said it would raise 148 billion yen ($1.33 billion) through the sale of convertible bonds to help fund its expansion into financial services and products powered by artificial intelligence. Line Corp, which has 164 million monthly active users across four key Asian countries of Indonesia, Japan, Taiwan and Thailand also said it plans to issue its own cryptocurrency token, Link, which it will use to reward users and developers for contributions to its services. We saw significant securities lending demand for Line Corp following the announcement of the capital raising.

Europe

Short interest spikes for Kier Group (KIE LN) and Sirius Minerals (SXX LN). A number of the hedge funds who took positions in Carrillion have increased positions in the construction and services group Kier. Short interest has spiked up to a four year high of ~15%. Kier is reported to operate a similar supply chain system to that which may have compounded the issues experienced by Carrillion. Short interest in Sirius Minerals, the explorer of the UK’s first potash mine, spiked as it warned that operation costs will be up to $500m more than budgeted for previously. An updated financial plan is reportedly being put together and this may include taking on a new strategic partner and/or raising equity via a bond sale or new share issuance. The share price is currently trading down 27% of last weeks close.

Mergers continue to drive securities lending demand as news of a $380 million deal between Hurricane Energy (HUR LN) and Spirit Energy (69% owned by Centrica) has been reached. The reported deal strengthens plans associated with the drilling of new wells west of the Shetland islands following a recent wave of activity in the North Sea region. Hurricane is due to start drilling the wells in the 1st Quarter of 2019 where results will be keenly anticipated. The share price in HUR LN initially rose 20% following the news. Clydesdale Bank (CYBG LN) remains popular with borrowers who aim to increase their positions for the possible deal. Short interest in the bank remains high following reports of an approved £1.7Bn takeover of Virgin Money. Short interest is currently at 12%.