From the Securities Lending Trading Desk

In Europe, oil and gas services and construction mid-caps have been highly sought after thus far in Q4.  Also, the discovery of another possible accounting irregularity at a major Japanese corporation threatens to derail Prime Minister Shinzo Abe’s plans to improve corporate governance in the nation. Meanwhile in the US, demand has been strong for ETFs amid a surge in fund values.

Below please find the November 10 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

Borrowers are seeking shares of GroPro following disappointing Q3 earnings.  Last week fees to borrow GoPro spiked following a heavy volume sell-off in response to disappointing Q3 earnings and lower Q4 revenue expectations. Weighted average fees to borrow GoPro increased 62% across the market.  The average daily trading volume for the stock was roughly 7.7mn over the past year — last week that number soared to 17.5mn.  In response, the company’s board of directors authorized a repurchase of up to $300 million (equivalent to roughly 12mn shares based on current market price) of common stock through a program which expires in September 2016.  We expect GoPro to be a long term focus of directional demand.

Demand has been strong for ETFs amid a surge in fund values.  Last week we saw demand for the iShares Russell 2000 Index ETF and the Powershares QQQ Trust, as both funds’ valuations rallied.  The iShares Russell 2000 ETF (IWM) holds mid and small-cap US stocks and its investments are in the smallest 2000 companies from the Russell 3000 Index.  The price of IWM has rallied 10% since closing at a 52-week low of $107.53 on September 29. We saw similar demand for the Powershares QQQ Trust Series 1 (QQQ) which holds large-cap US stocks and tends to be focused on the technology and consumer sector. QQQ is up 15% during the same period.  Typically, investors would short an ETF either because they believe the ETF is going to decline in value or to hedge a related financial position.

Asia Pacific

Standard Chartered Plc shares dropped the most in more than three years in Hong Kong and London following the announcement of job cuts and a capital raising.  The lender is planning to eliminate 17% of its workforce, scrap its dividend and launch a $5.1 billion rights issue as Chief Executive Officer Bill Winters seeks to restore profit growth. We have seen strong lending demand for Hong Kong listed shares which increased last week following the announcement of the discounted rights issue.

The discovery of another possible accounting irregularity at a major Japanese corporation threatens to derail Prime Minister Shinzo Abe’s plans to improve corporate governance in the nation.  Last week, Akebono Brake Industry disclosed to investors that it found evidence that it may have inflated revenue by 210 million yen ($1.7 million) in the second quarter of 2015.  As a result, we have witnessed an increase in securities lending demand for the auto-parts manufacturer.

Europe

Steelmaker Arcelor Mittal South Africa plans to raise up to 4.5 billion rand ($324 million) via a discounted rights offering to reduce its current debt level.  The company’s Dutch parent, ArcelorMittal, will fully underwrite the offer.  The company’s 2015 loss is expected to be 6 rand per share, which is 11 times higher than its 2014 loss.  This announcement comes as South African steelmakers are asking the government for protection against an increase in subsidized Chinese supplies. The rights issue is highly dilutive as the company seeks to raise roughly 150% of its current market capitalization.  Securities lending fees are trading special and are expected to increase into the offer period, which has not yet been announced.

Oil and gas services and construction mid-caps have been highly sought after thus far in Q4. Borrowers are seeking shares of FCC SM and CGG FP after the firms announced plans for rights issues. FCC is currently finalizing a capital increase for up to EU400 million. This would be the second capital increase for the struggling construction company. CGG plans to sell shares and assets after announcing a $1.07 billion loss for the third quarter. The company is on target for a third straight year of decline in customers’ exploration needs as a result of the continued soft price in crude oil.