From the Securities Lending Trading Desk

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If the securities lending market is any indication, lackluster retail sales in October could spell trouble for retailers’ holiday season. Meanwhile, problems continue to mount at one of Australia’s leading oil and natural gas companies and in Europe, Telecom Italia’s share conversion between ordinary and savings shares is bringing arbitrageurs to the table.

Below please find the November 17 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

If the securities lending market is any indication, lackluster retail sales in October could spell trouble for retailers’ holiday season.  According to the Commerce Department, October 2015 retail sales rose just 0.1% compared with October 2014.  Further, the SPDR S&P Retail ETF fell to a 52-week low last week.  This could signal a challenging fourth quarter for retailers – especially those that expect to generate a sizable portion of their annual sales in the last few months of the year.  We are seeing increased directional demand for companies such as GameStop Corporation, Wayfair, Sears Holdings, and JC Penny, all of which are trending lower in recent weeks.

Mylan’s hostile bid for Perrigo sparked initial broker demand,  however Perrigo’s shareholders ultimately blocked the takeover.  Only about 40% of Perrigo’s shareholders tendered their shares which fell short of the 50% needed for approval.  Mergers in this industry are not new news with companies such as Mylan, Teva, Walgreens, and CVS Health all proceeding with major deals pending clearance from regulators.  Although Mylan’s bid did not gain approval, it seems likely Perrigo will remain a target as other companies continue the consolidation trend in the generic drug industry.

Asia Pacific

Problems continue to mount at one of Australia’s leading oil and natural gas companies as a recent capital raising exercise failed to garner enough support from institutional investors.  Santos Ltd, which is grappling with high debts as a glut in supply of liquefied natural gas and low oil prices continues to dent profits, planned to raise a total of $3.5bn through a rights issue last week. However, not all investors were supportive of the plan given its highly dilutive effect as the stock tumbled by more than 27% upon resumption of trading.  We have witnessed a gradual increase in securities lending demand for shares in Santos in recent weeks.

Solar polysilicon prices continue to decline to record lows as a consequence of oversupply in the market.  Solar polysilicon prices have fallen for eight consecutive weeks and are currently below $15 per kilogram due to over-production in China.  We have seen demand to borrow GCL-Poly Energy Holdings Ltd and Xinyi Solar Holdings Limited.

Europe

The MSCI published the November semi-annual index review last week which included numerous deletions, causing increased borrower demand in Europe.  The changes will be effective as of the November 30.  The securities lending desk saw significant interest to cover short exposures in Norwegian drilling industry names, including Seadrill and Subsea, as well as emerging market miner Kumba Iron Ore.

Telecom Italia’s share conversion between ordinary and savings shares is bringing arbitrageurs to the table.  Telecom carrier Telecom Italia announced plans to consolidate non-voting class savings shares (TITR IM) into common shares (TIT IM), to be voted on in mid-December.  Currently, Telecom Italia ords trade at a premium and we’re seeing demand at warm levels as market utilization has surpassed the 50% threshold. The desk forecasts further demand heading into the vote if spread remains significant between the two lines. Telecom Italia savings shareholders would have two conversion options and a withdrawal right, which should garner demand for out of the money elections.