From the Securities Lending Trading Desk

Pharma

Mannkind, securities lending’s top grossing US directional name of 2015, is the focus of refinancing pressure as bearish investors close out shorts.  Australian-listed law firm Slater & Gordon tumbled last week after the UK government announced proposals to change the legal rights of people injured in car accidents. Meanwhile in Europe, Spanish renewable energy company Abengoa is in high demand following the firm’s filing for preliminary creditor protection.

Below please find the December 1 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

Merger and acquisition totals have reached an all-time high largely due to activity in the pharmaceutical sector.  Last week, Pfizer’s agreement to combine with Allergan pushed the value of 2015 deals past the previous highs set in 2007, according to data compiled by Bloomberg.  Deal making is expected to continue through 2016, despite headwinds such as concerns over a rising rate environment, a slowdown in China and global unrest amid terrorist threats.  Analysts predict strong M&A activity to continue in the healthcare industry, as well as technology, and oil & gas.

MannKind shares eased as the firm’s price fell to a 2-year low.  Mannkind, securities lending’s top grossing domestic directional name of 2015, is the focus of refinancing pressure as bearish investors close out shorts.  The stock’s share price fell to $2 per share this week. Mannkind has been a long term focus of demand and its share price has been extremely sensitive to news, good or bad. Recently the company decided to raise capital through a listing on the Tel Aviv stock exchange.  This created additional supply and caused fee levels to ease even further.  Despite cooling directional demand and increased supply, we believe demand will continue as Mannkind’s partnership with Sanofi could be terminated as early as January and sales of their top drug, Afrezza, remain lackluster.

Asia Pacific

Noble Group Limited, the Singapore-listed commodity trader which has faced persistent criticism of its accounting practices, is facing a credit rating downgrade.  Rating agency Standard & Poors issued a statement last week confirming that it may cut Noble to ‘junk’ status on concerns over the company’s liquidity. Noble’s shares have fallen by over 60% this year due to investor concerns related to its accounting methods and the business impact of slumping raw-material prices.  We have witnessed consistently strong demand to borrow shares of Noble Group in recent months.

Shares in Australian-listed law firm Slater & Gordon tumbled last week after the UK government announced proposals to change the legal rights of people injured in car accidents. Although the company does not expect it’s 2016 earnings to be affected by the proposed legislation, investors remain concerned over future revenues given its large presence in the UK.  Shares in the company have fallen by over 80% this year as it also grapples with an investigation by Australian regulators into its audit process after the company confirmed it had misreported cash flows in the UK earlier in the year.  We have witnessed strong securities lending demand for Slater & Gordon in recent weeks.

Europe

Spanish renewable energy company Abengoa is in high demand following the firm’s filing for preliminary creditor protection.  Shares sold off last week but rebounded on Monday after reports that a group of leading bondholders are ready negotiate debt restructuring.  Abengoa will continue to seek banks to underwrite their proposed €1.5bn rights issue, perhaps by banks which shoulder some of the $21bn debt exposure to the troubled company.  2015 is set to finish with $78bn worth of global defaults, the highest level in 6 years.  Both Abengoa class-A and B shares are trading at high utilization and fee levels.

A shake-up in the UK supermarket space has seen increased short interest in Sainsburys, Morrisons and Ocado.  Amazon recently announced a grocery service for Amazon Prime members.  The online giant will offer more than 4,000 products ranging from beer to pet food.  Share prices have fallen, shorts have increased, and fees have started to rise for Sainsburys, Morrisons and Ocado.