From the Securities Lending Trading Desk

This week, demand for ETFs is up and Korean shipbuilders are in the spotlight thanks to declining profits and increasing debt levels.  In Europe, earnings have been mixed, but securities lending demand remains strong across those reporting results.

Below please find the July 21 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

MPLX, the pipeline unit of refiner Marathon Petroleum, has announced plans to buy MarkWest Energy Partners for approximately $15.8 billion in stock and cash.  This is the latest example of consolidation among companies that move and process fuel.  Marathon’s share price rose to its highest level since its 2011 IPO.  The acquisition will be a “unit-for-unit” tax-free deal that includes a one-time cash payment to MarkWest unit holders, MPLX said in a statement.  The securities lending trading desk saw strong demand for MPLX following the announcement.

Demand for ETFs has picked up amid volatility in the market.  The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF has become extremely illiquid street-wide and creating the ETF has become difficult.  This is due largely to the fact that roughly 20% of the approximately 300 index components are currently halted from trading.  ProShares Ultra VIX Short-Term Futures ETF has also been in focus after the fund’s value fell 40% in the last week.  Borrower demand has been strong for these and other ETFs.

Asia Pacific

Korean shipbuilders continue to suffer from declining profits and increasing debt levels.  Korea’s ‘big three’ shipbuilders Daewoo Shipbuilding & Marine Engineering, Hyundai Heavy Industries and Samsung Heavy Industries booked losses on offshore projects last year forcing them to cut jobs and reorganize their businesses as the whole sector struggles with slumping orders.  Last week, Daewoo Shipbuilding & Marine Engineering’s share price fell sharply amid speculation that large losses will require it to restructure its debt.  We have seen strong lending demand across the entire sector.

The continued slump in global dairy prices has placed increased pressure on producers to cut costs and seek further efficiencies.  Increased global inventories and higher production levels have resulted in dairy prices reaching a six-year low.  We have witnessed increased securities lending demand for major regional producers, including China Huishan Dairy, China Modern Dairy and New Zealand’s Fonterra Cooperative Group on concerns that continued price declines will further erode profit margins.

Europe

Demand has increased for Spanish real estate companies.  Borrowers sought shares of Merlin Properties Socimi and Lar Espana Real State Socim on news of planned rights issues.  Merlin Properties Socimi announced plans to raise $1.12 billion with a 2 per 3, $140.31 million share issue at $8.69.  Lar Espana Real State Socim shareholders have approved a 1 per 2, $146.7 million cap increase at $7.34.

European earnings have been mixed, but securities lending demand remains strong.  A number of companies, including Getinge and SKF, missed estimates which is driving lending demand.  Getinge’s share price experienced its largest decrease since October 16th, after company reported missing 2Q pre-tax profit.  SKF’s share price experienced its largest drop in 3 months on poor numbers.  Borrowers are also seeking shares of firms that beat estimates, including Swatch and Alfa Lavel.  Swatch’s share price rose after operating profit for the first six months of the year beat estimates.  The company also announced that it expects a strong second half.  Shorts are at multi-year highs, having doubled year over year.  Alfa Lavel shares surged on quarterly profit that beat estimates.  Pre-tax profit rose 26% to $171 million.