In the Americas, Frontier is the owner and operator of an extensive copper and fiber optic network but they are up against a massive debt burden. In Asia, shares in the Doosan Group of companies plunged last week after reporting worse than expected earnings. In Europe, the UK contractor, Interserve (IRV LN), has seen two of its largest shareholders refuse to back a deal the board had set out to swap creditor balances for equity in the firm.
A secondary offering from Chinese company Pinduoduo Inc flooded the lending market recently, effectively flattening demand for its US ADRs and prompting widespread returns. The e-commerce and entertainment company which IPO’d last summer raised funds north of $1billion from the offering which will be used to fund its massive operating expenses. Pinduoduo continues to challenge rivals Alibaba and JD.com Inc as it has now reached a market value of $34billion following the offering. The influx of new supply in the market has ended PDD’s run as one of lenders’ top earning stocks.
Speculation on both sides has driven up lending fees on Frontier Communications Corp as a daunting billion dollar debt wall looms. Frontier is the owner and operator of an extensive copper and fiber optic network but they are up against a massive debt burden ($16.4bln long term debt), obsolete technology, and the threat of bankruptcy. Long investors have sized up the upside of a rebound after seeing FTR fall 98% over the last four years. They are betting on a huge turnaround for a company paying down debt with a meaningful communications network that just needs financing and rebranding. The short bet is that FTR will continue its years-long nosedive and head into bankruptcy.
Shares in the Doosan Group of companies plunged last week after reporting worse than expected earnings. The group’s various subsidiaries including Doosan Heavy, Doosan Infracore and Doosan Engineering & Construction all reported large scale losses as a result of increased costs and reduced sales. Ratings agencies led by Korea Rating and NICE Investors Service both put these subsidiaries on a negative review on concerns over their long-term financial stability. Separately Doosan Engineering & Construction announced that it was considering a 400bn won ($355 million) share sale in which Doosan Heavy is expected to participate in. We have seen an increase in securities lending demand for Doosan Infracore and Doosan Heavy in recent weeks.
One of Japan’s leading rental unit providers announced a record loss for a nine-month period from April to December 2018. Leopalace21 Corp said it booked a net loss of 43.9 billion yen ($400 million), its first loss for the same period in seven years, as it was hit hard by a series of penalties for building code violations at its properties. The company had reported last year that it was facing problems with partition walls in various apartments that it had constructed, including issues with defects with fire resistance and noise insulation for more than 1,300 buildings throughout Japan. These issues are expected to negatively impact earnings in the medium to long-term as these apartments will not be available for leasing until the necessary repair work has been completed. We have witnessed increased securities lending demand for Leopalace21 Corp in recent weeks, which has seen its share price decline by over 50% since the beginning of February.
Interserve (IRV LN) battles with shareholders over a debt to equity swap deal to protect against liquidation. The UK contractor has seen two of its largest shareholders refuse to back a deal the board had set out to swap creditor balances for equity in the firm. New York based hedge fund Coltrane, who benefited from short positions in the former Carillion, owns 27% of IRV LN and argued that the deal is unnecessary calling for all board members except the chief executive, Debbie White to be removed. The debt for equity swap would all but wipe out the funds position in the firm and hand control over to its creditors. The plot thickens after a previous financing deal agreed last year included provisions that would trigger a £66 million pay-out if a new deal wasn’t secured. Coltrane finds itself between a rock and a hard place with a new deal wiping out most of their ownership or voting against a deal and see the ailing contractors financial position further stressed with the £66 million payment. Industry on-loan utilization remains high at 75%
Securities lending demand for Plus500 increased this week after the trading platform releases a surprise profit warning. Plus500 (PLUS LN) fell up to 45% this week after it warned that 2019 earnings would be materially lower than expected as a clampdown in the offering of CFDs by EU regulators look set to intensify throughout the year. Plus500 had gained over 110% in the first half of 2018 as it experienced record revenues only to see its rally come to an end in August following announcement that new EU rules could affect up to 50% of its revenues. Since then the price as decreased from £20.77 highs to lows of £8.67 this week. Short interest and industry on-loan utilization has increased to 9.9% and 35% from 0.35% and 2% respectively since this time last year.