This week, we discuss a key M&A deal driving demand in the US, focus on the effects tourism restrictions in Hong Kong are having on the lending market, and explain why the Polish election is spurring demand for European banks.
Below please find the June 2 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.
M&A continues to drive demand. Borrowers are seeking shares of Charter Communications after the firm revealed plans to buy Time Warner Cable for roughly $55 billion in cash and stock. The transaction is expected to be completed by the end of 2015, provided it receives regulatory approval. We saw strong broker demand for Charter as soon as the deal was announced. Utilization nearly doubled from the previous day.
Demand has been strong for Sears Holdings following a rally in the share price on unusually high volumes. Last Monday’s trading volume was 64% higher than the average daily volume over the past month, which we view as an extreme increase over typical activity. Fee levels remain subdued, however. We will continue to monitor this long-term focus stock and suspect fees will increase amid pessimism regarding restructuring efforts and the company’s ability to regain lost market share.
A curb on the number of visits mainland Chinese visitors can make to Hong Kong has negatively impacted retailers’ earnings and resulted in increased securities lending demand. The additional restrictions, which went into effect in April, have come at a time when luxury goods and retail sales continue to exhibit signs of slowing as a result of decreased tourism. Consequently, we have witnessed strong lending demand for cosmetics retailer Sa Sa International Holdings and Chow Tai Fook Jewellery.
Demand has been strong for Sunac China Holdings and Kaisa Group Holdings, as the market questions Chinese property developers’ ability to pay outstanding debts. Sunac pulled out of a deal to buy troubled Chinese developer Kaisa. The decision came after months of negotiations with bondholders over the terms of a rescue deal that failed to make progress. Earlier this year, Kaisa was the first Chinese developer to default on offshore debt.
The Polish election result has increased regulatory risks for banks, generating demand for European banking entities with large exposures to the Polish economy. Andrzej Duda’s surprising win in Poland’s presidential election has increased the likelihood of his party taking control of the government in November’s parliamentary election. Policies put forward by his Law and Justice Party would create an additional $1.4 billion tax burden on the Polish banking industry. Demand has been strong for Portugal’s Banco Commercial Portugues and Austria’s Raiffeisen bank.
Borrowers are seeking European telecom names whose performance has weakened relative to the broader index. Telecom Italia and TalkTalk shares continue to see the most demand, compared with their peers. Telecom Italia’s weaker position in Brazil after the firm’s acquisition of GVT, combined with earnings weakness in Italy, has also been driving demand. Demand has been driven by TalkTalk’s forecast for Ebitda toward the “lower end of market expectations” and its industry-high EV-to-Ebitda.