From the Securities Lending Trading Desk

From the Securities Lending Trading Desk

This week, Chinese automakers have been in the spotlight as declining sales impact profit margins.  In the US, many companies have decided to postpone planned IPOs due to market volatility and uncertainty, however those bucking this trend are seeing securities lending demand.  European demand continues to focus on offshore drilling firms and Volkswagen. 

Americas

Many companies have decided to postpone planned IPOs due to market volatility and uncertainty, however some are bucking this trend.  During the third quarter, only 34 companies debuted in the public market, down 43% year-over-year, according to Renaissance Capital.  In contrast, not only are some IPOs moving ahead, we’re seeing many technology startups report valuations larger than $1 billion, including Pure Storage, the third-biggest seller of all-flash storage systems.  The securities lending desk is watching this and other IPOs, including Petco, Neiman Marcus and Ferrari.

Borrowers are seeking shares of Exact Sciences after the firm lost more than half of its market value last week.  The US Preventive Services Task Force (USPSTF) has questioned the benefits of its colon cancer test, which is sold as Cologuard.  This could have a serious impact on Exact Sciences because the US Patient Protection and Affordable Care Act allows insurers to limit coverage of screenings that the USPSTF has not endorsed.  Long-holder sale activity has put a squeeze on available shares in the lending market.  Borrower demand is strong and fee levels have ticketed up slightly.

Asia Pacific

Chinese automakers have been in the spotlight as declining sales impact profit margins.  The combined net income of eight leading Hong Kong-traded Chinese car dealers fell 29 percent in the first six months of this year.  Although a recent cut in passenger vehicle purchase taxes is likely to provide a short-term boost to sales, longer term prospects appear challenging for the sector.  Securities lending demand has increased for Great Wall Motor Company and Zhongsheng Group Holdings on concerns a recent share price rally is unlikely to be sustainable.

Oil prices extended their gains last week, causing Asian energy stocks to experience their strongest rally since 2008.  Shares in mining firms rose sharply last week due to a combination of the rally in the oil price, the potentially later than expected US interest rate increase and the absence of further negative data from China.  Concerns surrounding the sustainability of the rally remain, however, amid declining coal demand.  We continue to see lending interest in China Coal Energy and Yanzhou Coal Mining.

Europe

Securities lending demand remains focused on offshore drillers.  Borrowers are seeking shares of Transocean and Seadrill following Petrobras’ announcement of further cuts in spending.  Seadrill has $1.15 billion in backlog exposure and Transocean has $966 million in potential revenue at risk, however Seadrill’s Chief Executive has stated that 2017 could be a turning point for the industry.

Borrowers continue to show interest in Volkswagen as hedge funds get caught in a short squeeze.  Following the recent news in relation to the Volkswagen emissions investigation, Volkswagen ordinary shares have started to move out of line with the preferred shares. Demand for the ordinary shares has increased this week as hedge funds compete to protect shorts and enter the pairs spread. The securities lending desk continues to monitor liquidity in the ordinary shares for re-rate opportunities.