From the Securities Lending Trading Desk – Week of March 11th

In the Americas, Eli Lilly and Company (LLY) completes a spin-off of its remaining interest in Elanco Animal Health (ELAN). In Asia Pacific, a new announcement caused shares in Kawasaki Kisen Ltd to slide as much as 10%. In Europe, UK retail is a focus for borrowers again this week as Debenhams returns to the headlines.

Americas

Eli Lilly and Company (LLY) completes a spin-off of its remaining interest in Elanco Animal Health (ELAN). The exchange offer made waves in the lending market as borrowers sought to cash in on the offer to exchange LLY shares for ELAN shares at a 7% discount. With multiple ways to realize the spread in the trade, demand spiked for both names during the trading period with heavy interest street wide. Elanco only IPO’d in September of 2018 so Eli Lilly received a waiver on the lock-up period in order to complete the exchange.

Real Estate Investment Trust, Seritage Growth Properties’ (SRG) recent suspension of its dividend has reawakened lending interest amidst falling profitability. Seritage spun off from Sears Holdings back in 2015 with the intent of redeveloping their real estate properties over time to accommodate more lucrative tenants than Sears. However, with Sears dropping 93% in price in less than 2 years and closing stores faster than anticipated, Seritage’s long term plans were squeezed. The reduction and suspension of the dividend is being done to conserve capital liquidity to move forward with their redevelopment plans. Investors have not hit the panic button just yet; with new tenants and leases in the pipeline, Seritage could be restoring their dividend in the near-future.

Asia Pacific

Chinese property developer China Evergrande Group surged in Hong Kong trading after the company announced a 90% rise in 2018 core profit. In a statement to the Hong Kong Exchange the company attributed the profit rise to improvement in product quality, reduction in sales and management expense ratios, and an increase in the floor area of properties delivered during the year. Shares in China Evergrande Group have risen 51% since October 2018. We saw a short term spike in lending demand for China Evergrande Group following the announcement.

Japanese Marine cargo and passenger transportation company Kawasaki Kisen Ltd fell in Tokyo trading after forecasting a full year loss and indicating it needs to improve its capital base. The company now forecasts an operating loss of 100 billion Yen verses a prior forecast of 20 billion Yen. The announcement caused shares in Kawasaki Kisen Ltd to slide as much as 10%. We saw strong securities lending demand for Kawasaki Kisen Ltd following the announcement.

Europe

UK retail is a focus for borrowers again this week as Debenhams returns to the headlines. Debenhams (DEB LN) issued yet another profit warning this week as the UK retailer warned that the projections outlined in its last statement (January 2019) may not be met due to the cost of its rescue plan. Shareholder Mike Ashley (29.7% stake) also stepped up his campaign to install himself on to the management team of the company, proposing a plan to join the board whilst stepping down from his responsibilities at his founding company Sports Direct. Debenhams aims to prevent the changes and said that talks with creditors are making progress. DEB LN is down 88% in the last 12 months. Short interest remains high at 21%, a 24% increase since December.

Demand for Cellnex increased this week as it presented M&A intentions and a previously-announced rights issue began trading. Telecommunications company Cellnex (CLNX SM) rose to its highest price on record this week as it increased revenue estimates and outlined expanded plans to purchase cellular tower sites to expand its presence throughout Europe. The EUR 1.2B capital increase began trading on Monday and will end on 16th March. We continue to monitor the spread between the ordinary shares and the rights. Short interest has increased from 8.65% to 18% following the news.