From the Securities Lending Trading Desk

A merger between two US and Finnish construction manufacturers is expected to drive prolonged demand.  Meanwhile, South Korean consumer-related companies have been in focus as a result of last week’s surprise decision by the Chinese central bank to devalue its currency.  In the US, pharmaceuticals and a popular burger chain are seeing strong demand.

Below please find the August 18 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

Price volatility for Aquinox Pharmaceuticals has spawned demand and higher fees.  There has been a sharp uptick in demand for Aquinox as the share price rallied from $1.46 on July 27 to $20.56 on August 17.  Lending supply virtually disappeared last week when utilization spiked to 100%.  The market reacted positively to news that Aquinox’s treatment for bladder pain and potentially eczema performed favorably in the latest round of testing.   As a result of strong demand and limited supply, fee levels remain elevated.

Fee levels remain high for Shake Shack, but this could change once the firm’s options begin trading.  Shake Shack, the New York-based burger chain, experienced its largest single day decrease in stock price following the announcement of a secondary stock offering.  Liquidity remains extremely tight and fee levels continue to increase, however it is expected that options will begin trading within the next two weeks.  This should provide greater borrowing liquidity and result in easing fee levels.

Asia Pacific

China is seeking scale through mergers to boost the global competitiveness of state-run companies.  Late last week the Chinese government announced a planned merger between China Cosco Holdings and China Shipping Container Lines to boost economies of scale and allow the merged company to compete with bigger rivals such as AP Moeller-Maersk A/S.  China is likely to pursue a similar strategy in a range of sectors including aviation, construction, defense and telecommunications.  In May, state-owned railway companies CSR and China CNR combined to form CRRC Corp.  The securities lending trading desk has seen strong lending demand for both China Cosco Holdings and China Shipping Container Lines.

South Korean consumer related companies have been in focus recently as a result of last week’s surprise decision by the Chinese central bank to devalue its currency.  In particular, we have witnessed increased securities lending demand for duty-free operator Hotel Shilla, which is estimated to derive approximately 50% of their sales from Chinese visitors, on concerns the devaluation in the yuan could result in reduced tourist spending.

Europe

MSCI rebalances have resulted in decreased liquidity in certain European names.  MSCI announced the August 31 changes last week with 3 deletions to the European components of the index: Ektab (Sweden), Vallourec (France) and Getin Noble Bank (Poland).  Liquidity often dries up around the MSCI re-balances as tracking funds adjust their holdings.  The securities lending desk is remaining watchful of liquidity squeezes and increasing levels.

Finland’s Konecranes has agreed to combine with Terex, US maker of cranes and construction machinery.  Terex shareholders will receive 0.8 of a Konecranes share for each of their Terex shares.  The all-stock deal has created significant demand for shares of Konecranes and the lengthy carry until June 2016 completion should keep utilization levels elevated.