From the Securities Lending Trading Desk

Steel Worker

In Europe, the global slowdown continues to bear down on the steel industry while in America we are seeing renewed demand in the solar sector due to the expiration of a 30% tax credit at the end of next year. Meanwhile in Asia, low oil prices have reduced demand for production facilities and led to losses at Singapore based rig builder Sembcorp Marine Ltd.

Below please find the December 8 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

We are seeing renewed demand in the solar sector due to the expiration of a 30% tax credit at the end of next year.  The Energy Information Administration suggested that sales of rooftop solar photovoltaic installations could fall as much as 94% without the 30% tax credit.  We are seeing strong demand for SolarCity Corporation.  Short interest in the name has increased 46% year to date with 22.6% of total shares outstanding on loan, according to Markit.  As a result, fee levels have nearly tripled.  SunEdison, which manufactures semiconductors and solar energy technology, has seen its share price fall from $32.13 on June 23 to $2.82 on November 20.  Renewable energy is expected to be a strong focus throughout 2016 due to continued uncertainty on the future of the tax credit.

Record November auto sales are pushing Credit Acceptance Corporation higher, but the market is questioning the share price’s 41% rally.  We are seeing strong directional demand for CACC which provides automobile dealers financing programs, and related products and services that enable them to sell vehicles to consumers.  Earlier this week it was announced that US auto sales were on pace for a record 2015.  In mid-November, CACC fell to a six-month low after several law offices announced investigations into CACC, including whether the board had breached its fiduciary duties to shareholders.  Fee levels and utilization have soared amid limited streetwide availability and growing demand.

Asia Pacific
Low oil prices have reduced demand for production facilities and led to losses at Singapore based rig builder Sembcorp Marine Ltd.  The world’s second-largest rig builder slumped to its lowest price in more than six years in Singapore after the company said it expects to post its first quarterly loss since 2003.  Sembcorp Marine’s third-quarter net income dropped 76% as customers requested delivery deferrals for jack-up rigs.  We have seen strong lending demand for Sembcorp Marine and other Asian companies with exposure to the oil industry.

Sharp Corp shares continued to decline after a government fund failed to agree terms to invest in the struggling Japanese electronics manufacturer.  Innovation Network Corp of Japan put off a plan to invest about 200 billion yen ($1.6 billion) in Sharp Corp which has lost more than 1.2 trillion yen during the past four financial years as rival LCD makers undercut its business. We have seen long term lending demand in Sharp Corp.

Europe
The global slowdown continuing to bear down on steel industry.  Steel demand in China — which makes up half of the total global consumption — has fallen 5.1% year to date, following a 2.5% decline in 2014.  Steel demand is also dropping elsewhere, with the US down 15.2% through July and Japan 4.2% lower through October. From a lending perspective, demand had been restricted to the mid-cap players, with companies such as Vallourec, Kloeckner and SSAB trading at special levels, however this week saw a move towards the large cap players as demand started to filter into companies such as Arccelormittal.  The securities lending desk remains watchful of levels across the steel industry.

Alstom, manufacturer of TGV and Eurostar equipment, remains in focus.   The firm’s €3.5 billion buy back continues to drive prime broker demand for un-tendered shares.  At market prices, un-tendered shares currently demand a premium to the full market take up.