From the Securities Lending Trading Desk

This week, the reconstitution of the Russell Indexes is driving US activity, while borrowers are seeking shares of South Korean casino operators and European luxury goods producers.

Below please find the July 7 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

US activity has increased as a result of the 2015 reconstitution of the Russell Indexes. These indexes rebalance annually.  As investors look to mirror their composition, changes in the index (deletions and additions) result in buys and sells for long holders, and new loans and returns for brokers.  We’ve seen strong demand for a number of additions, including Blue Bird Corp, Etsy, and InVivo Therapeutics Holdings.  A number of deletions are also seeing demand from borrowers, including Aeropostale, Bio-Path Holdings, The Bon-Ton Stores, and Molycorp.

Global M&A is on pace to pass $3 trillion for the first time since 2007 and is generating new opportunities for securities lenders.  Last week, Danaher Corporation announced amendments and an extension on their previously announced plans to sell Tektronx Comm to NetScout Systems.  The changes to the limit on the exchange ratio reinstated a spread, which resulted in renewed interest from borrowers.  The new expiration date is July 9, with a protect period through July 14.  Danaher was actively located by borrowers.

Asia Pacific
Concerns persist that excessive margin trading is fuelling the extreme volatility seen in the China A-Share market.  A surge in the use of leverage has helped fuel the longest ever bull market in Chinese stocks.  Last week however, the Shanghai Composite tumbled more than 20% from this year’s high.  The government has taken steps to relax margin trading rules to help prevent a free-fall in share prices, however there remains a risk that added leverage will expose retail investors to even greater losses and spur bigger price swings in the future.  We have seen securities lending demand increase for Hong Kong-listed Chinese brokerages such as Citic Securities, China Galaxy Securities and Haitong Securities.

Challenging times continue for South Korean casino operators as they contend with the ongoing MERS virus scare and a reduction in tourist visits from China.  The recent arrests of several employees of South Korean casino operators for allegedly marketing to Chinese gamblers demonstrated the Chinese government’s resolve to further clampdown on its citizens gambling overseas.  The securities lending market continues to witness strong borrowing demand for two of South Korea’s largest casino operators, Grand Korea Leisure and Paradise Co., on concerns the ongoing curbs and falling visitor numbers will dent revenues.

Steel producers and Iron ore miners remain under pressure from weak Chinese growth.  Iron ore capped the biggest weekly loss since April as shipments surged and data showed the slowdown in China’s steel industry deepened.  China’s construction industry slowdown is putting further weakness on the steel supply chain.  The European desk is seeing demand for European steel producers, including SSAB, Voestalpine and Kloeckner.

The performances of global luxury goods manufacturers’ share prices have been tied to currency moves this year.  The strong US dollar has penalized those companies with global sales models reporting in the currency.  We have seen utilization increase year to date for several European companies including Cie Financiere Richemong and Swatch Group, both of which report in USD.