From the Securities Lending Trading Desk

Fee levels are climbing higher for American Railcar Industries thanks to illiquidity in the market and a repurchase plan for $250 million of common stock.  Borrowers are seeking shares of South Korean duty-free retailers thanks to reports that the government is considering wide-ranging reforms for the industry.  Meanwhile in Europe, two rights issues, Fincantieri and Hochschild, are seeing increased demand.

Below please find the October 20 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

Last week BofI fell from its 52-week high of $142 to $99, amid allegations by a former auditor that the company withheld important information.  In the wake of these allegations, BofI held a conference call that put many investors’ minds at ease.  While the share price rebounded by nearly 20% following the call, this was still well short of the firm’s valuation.  BofI’s volatility has caused some analysts to suggest this is a buying opportunity.  From a securities lending standpoint, we saw immediate directional demand and fee levels ticked higher.

Fee levels are climbing higher for American Railcar Industries thanks to illiquidity in the market and a repurchase plan for $250 million of common stock.  After falling to a 52-week low of $33 at the end of September, American Railcar’s share price has rallied roughly 45%, resulting in a short squeeze.  As the share price climbs, bearish investors could potentially face losses on their short positions.  Though it is not known whether the majority of the gains are due to the squeeze or due to the company’s fundamentals, securities lending fee levels are climbing amid buy-in pressure and limited supply.

Asia Pacific

Despite managing to reduce both its cost base and debt significantly, challenging times lie ahead for Fortescue Metals Group.  The Australian-based iron ore miner announced last week that it reduced expenses by 24% versus the previous quarter as a result of drastic cost reductions and increased operational efficiencies.  We continue to witness strong securities lending demand for the company as the long-term outlook for iron ore prices remains uncertain given the continuing slowdown in the Chinese economy.

According to recent media reports, the South Korean government is considering wide-ranging reforms to the duty-free retail sector.  The measures currently being reviewed include higher duty-free licensing fees, which consequently will lead to lower margins for retailers.  We have witnessed increased securities lending demand for Hotel Shilla, the nation’s 2nd largest duty-free retailer, as it also reported lower than expected sales figures during the recent Chinese Golden Week holiday period.

Europe

Emerging market funds are seeing outflows as China’s growth figures continue to signal weakness in the region.  The securities lending desk has seen interest across emerging market-listed fund managers, notably Ashmore, which has seen a 13% contraction in its assets under management during Q3.  Ashmore continues to tighten as beneficial owners reduce their long exposure to emerging markets and hedge funds compete to retain their short positions.

Two rights issues, Fincantieri and Hochschild, have seen increased demand.  The Italian ship builder, Fincantieri, halted production after its share price fell 13% as a result of a profit warning and announcement of a potential €500 million capital increase.  In the UK, Hochschild announced a £64.8 million rights issue.  Shareholders will be able to subscribe for three new shares for every eight held at 47p. The capital will be used to strengthen the balance sheet and also repay debt.