From the Securities Lending Trading Desk

US retailers are in focus as borrowers look ahead to the holiday season.  Meanwhile, the fortunes of Takata Corporation continue to flounder in response to mixed messages from the US automobile regulator and hedge funds are taking profits amid economic policy intervention.

Below please find the October 27 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

Securities lending demand is increasing for both General Electric and Synchrony Financial as details and critical dates of the former’s spin-off of the latter are released.  Spin-offs typically create significant stock loan demand due to the arbitrage opportunity created when shares are offered at a discount.  Earlier this month we saw demand for Dow Chemical and Olin for the same reason.  In the General Electric/Synchrony deal, investors have the option to exchange their GE shares for Synchrony shares at a 7% discount.  The deal is expected to close by mid-November.

Retail stocks are in focus as borrowers look ahead to the holiday season.  JC Penney, Sears Holdings, and Aeropostale have all seen long-term bearish sentiment.  According to data from the US Commerce Department, September retail sales only gained 0.1%, which fell short of the median forecast of 0.2%.  This sparked concerns about consumer spending power and whether the momentum seen in previous months is sustainable.

Asia Pacific

The fortunes of Takata Corporation continue to flounder in response to mixed messages from the US automobile regulator.  In September, the National Highway Traffic Safety Administration (NHSTA) confirmed that approximately one third fewer airbags than originally estimated would need to be recalled for repair of a major flaw in the car inflators manufactured by the Japanese firm. However, last week the NHSTA seemingly stepped back from those comments as it indicated that their investigation may now expand beyond the current 11 major automakers.  We continue to witness strong securities lending demand for shares of the troubled airbag manufacturer.

Shareholders of Wumart Stores received positive news last week after its largest shareholder offered to buy out the remainder of the company that it does not currently own. Wumei Holdings offered HK$6.22 per Hong Kong-listed ‘H’ share in an all cash deal, which equates to a 90% premium from the pre-announcement price. The offer, which has resulted in an increase in securities lending demand for Wumart Stores, is particularly timely given the grocery store operator has lost half its stock value this year as it grapples with intensified competition and declining earnings.

Europe

Demand for TalkTalk tightened following a cyberattack on the company’s website.  TalkTalk, the UK telecommunications provider, slumped further this week after it reported it had been subject to a significant and sustained hack in which customer bank account details were compromised. Through Q3, TalkTalk became the most shorted stock in the European telecoms sector as investors expressed doubt on the company’s ability to expand and compete within the UK market.  We remain vigilant of further tightening on the back of the news.

Hedge funds are taking profits amid economic policy intervention.  European desk saw some softening in oil, gas and mining names this week as hedge funds started taking profits after equity markets were bolstered by another 0.25% interest rate cut in China and Mario Draghi intimated a further reduction of the European deposit rate. The European desk has focused on maintaining utilization levels for names that are experiencing increased liquidity.