From the Securities Lending Trading Desk

From the Securities Lending Trading Desk

Demand for new IPOs has increased following a relatively quiet first three quarters, while problems continue to mount for leading South Korean engineering and heavy industry firms amid declining profits and increased debt levels. Also, European companies are following their US counterparts by utilizing excess cash on share buybacks.

Below please find the November 3 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

Demand for new IPOs has increased following a relatively quiet first three quarters.  Pure Storage, the third-biggest seller of all-flash storage systems, was a major focus of borrowers earlier this month and this week we have seen strong interest for Ferrari NV.    After debuting at $52 and spiking to a high of $56.75, Ferrari’s share price has since fallen roughly 10%.  Important to note, Fiat Chrysler will distribute its remaining 80% stake in Ferrari at beginning of next year which could spark another uptick in demand as increased liquidity often causes the share price to fall.  First Data Corporation and Square, Inc. are also expected to go public in 2015.

Corporate action events continue to drive demand.  Strong demand remains for Synchrony Financial, which is being spun off from General Electric.  This week we saw the beginnings of broker demand for Piedmont Natural Gas Company amid news they may be acquired by Duke Energy Corp.  Although this is an all-cash deal, which would not typically generate lending opportunities, some hedge funds may be looking to short the target, Piedmont, after the price spiked to a 52-week high on October 26.  Finally, the desk is seeing demand for one to three month term loans of Comcast Corporation as the company looks to complete a class conversion.  Comcast claims this will eliminate investor confusion and improve trading liquidity.  The share price on both classes has risen this week.

Asia Pacific

Problems continue to mount for leading South Korean engineering and heavy industry firms amid declining profits and increased debt levels.  Samsung Engineering Co, the nation’s largest builder of engineering projects, reported a larger than expected loss last week and announced plans to raise additional capital via a rights issue.  We are witnessing strong securities lending demand across the sector as firms such as Daewoo Shipbuilding & Marine Engineering, Hyundai Heavy Industries and Samsung Heavy Industries remain under immense pressure as a result of delays in overseas projects and declining orders which continue to dent earnings.

Sharp Corp shares fell to a record low last week after the troubled electronics manufacturer lowered its profit forecast. The forecast was cut 88% due to a slump in demand for smartphone displays in China. Sharp Corp has posted a net loss in three of the past four years due to increased competition from Chinese and South Korean manufacturers. We continue to see strong lending demand for Sharp Corp.

Europe

Falling iron ore prices are driving shorts for smaller, high-cost miners. Top Asia-Pacific and Brazilian producers such as Rio Tinto, BHP Billiton and Vale continue to flood the market by expanding low-cost supply while keeping a lid on prices.  Iron ore prices fell below $50 per ton, its lowest level since July, signaling that the market for steel’s key ingredient may not have reached equilibrium between growing cheap supply and sputtering Chinese demand.  For perspective, iron ore prices traded nearly $200 in 2011, mainly driven by robust Chinese steel consumption.  Vedanta Resources has seen high demand amid the challenging commodity backdrop, low free float and shallow lending pool.  Further up the supply chain, steel producers such as Finland’s Outokumpu, Sweden’s SSAB, Germany’s Kloeckner, Spain’s Acerinox and France’s Vallourec have all experienced heightened demand and currently trade in the warm to hot fee range.

European companies are following their US counterparts by utilizing excess cash on share buybacks.  Germany’s Rhoen Klinikum and Spain’s Abertis have launched share buybacks this fall.  The securities lending desk has capitalized on the arbitrage spread between spot and tender prices for untendered stock.  France’s Alstom is seeking shareholder approval for a €3.2billion – €3.7 billion buy-back deal at their board meeting on November 4.   The deal is expected to be completed by year-end.