From the Securities Lending Trading Desk

Oil (3)

OPEC’s refusal to cut oil production has pushed American crude to its lowest levels in six years and put oil producers in focus.  Meanwhile in Europe, demand to borrow Aixtron has increased in relation to falling oil prices. In Asia, securities lending demand for China-based property developer China South City Holdings has increased in recent weeks after a recent credit downgrade by Standard & Poors.

Below please find the December 15 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

Directional demand has increased for Outerwall following a guidance cut that sparked a sharp decline in share price.  Fee levels trended higher for Outerwall after the company lowered its full-year outlook largely due to weaker-than-expected results from their Redbox business.  As a result, the share price fell roughly 29% last week, closing at a 52-week low of $40.90 on Wednesday.  Outerwall has been a long-term focus of demand in the lending market as the company tries to cut into Netflix’s subscriber base with their Redbox kiosks. Though this remains a struggle, Morningstar reports that the current challenge is “the historically low box office during the third quarter, which was the worst theatrical box office in Redbox kiosks in four years.”

OPEC’s refusal to cut oil production has pushed American crude to its lowest levels in six years.  Many analysts had suggested $40 could be the floor for oil prices, but that was not the case.  West Texas Intermediate oil for January delivery fell to just $37.65 a barrel.  As producers struggle to break-even, they have been forced to cut costs and focus on technology and innovation to remain competitive.  We are seeing strong directional demand for many names in the sector, including Laredo Petroleum, Chesapeake Energy, EP Energy, and GulfMark Offshore.

Asia Pacific

Securities lending demand for China-based property developer China South City Holdings has increased in recent weeks after a recent credit downgrade by Standard & Poors.  The rating agency lowered China South City’s long-term credit rating to “B” from “B+” on concerns over its cash flow and liquidity profile.  Weak sales execution and a poor outlook for growth over the next 12 months were also cited as reasons for the developer’s downgrade, which has also seen its share price decline by over 50% this year.

Shares in Chinese property developer China Vanke Co Ltd were volatile following last week’s announcement that its largest shareholder had changed.  Following a company statement on December 6, shares initially fell 5.3% in Hong Kong trading before rising over 8% later in the week, as details of a 5% stake increase by Angbang Insurance were revealed.  Historically, lending demand for China Vanke has been driven by valuation differences between the developer’s Hong Kong and mainland Chinese share listings.  We saw an increase in lending demand for China Vanke Co Ltd last week.

Europe

Demand to borrow Aixtron has increased in relation to falling oil prices.  Germany-based Aixtron produces equipment that helps service solar cell applications.  The alternative energy sector overall remains under pressure as oil continues to be a cheaper option over solar energy.

Interest continues to surge for drilling, mining, and manufacturing companies.  European industrials are struggling due to low commodities prices, extremely low oil prices, and the Chinese economy’s transition away from manufacturing.  This has caused hedge funds to seek exposure to companies such as FLSmidth in Denmark and the Norway’s Seadrill.  We remain watchful as this trend is expected to continue.