From the Securities Lending Trading Desk

Urban Property Development

Demand has increased for Chinese property developers as a result of increasing headwinds due to a supply glut in Chinese real estate and growing debt burdens. Shares of troubled French oilfield surveyor CGG are in demand due to a highly discounted rights offer.  Meanwhile in the US, fee levels have risen for Tesla amid a 16.5% drop in share price in the first few weeks of 2016.

Below please find the January 19 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

Fee levels have risen for Tesla amid a 16.5% drop in share price in the first few weeks of 2016.  Tesla’s share price fell to a six month low of $200.31 on January 13 on concerns over the company’s cash burn rate and their ability to ramp up production as expected for the Model X.  Tesla common shares have the highest loan value of any common stock in the securities lending market which makes any movement in fees quite meaningful to securities lending income.

Waste Connections Inc. of Texas agreed to buy Ontario-based Progressive Waste Solutions Ltd. in a reverse merger deal that would move their tax domicile to Canada.  Inversions will likely remain in the spotlight in 2016 as more firms pursue these deals and the US government continues to review the practice.  M&A in general was a major story throughout 2015 that has carried over into the new year – good news for the securities lending industry since deals with a stock component can present lending opportunities.  Analysts predict this will continue, notably in the healthcare, technology, and oil and gas industries, despite headwinds such as concerns over a rising rate environment, a slowdown in China and global unrest amid terrorist threats.

Asia Pacific

Suppliers of components for Apple’s iPhones were in focus last week after media reports suggested that the company may cut production of its latest phone models this year. The Nikkei Asian Review reported that the technology giant was said to be considering reducing the output of new iPhones by at least 30% by the first quarter of 2016.  We have witnessed increased securities lending demand for several firms heavily involved in the iPhone supply chain such as AAC Technologies, Japan Display Inc. and Sharp Corp., on concerns that this latest news could be a precursor for a prolonged decline in sales for Apple’s flagship product.

Chinese property developers are facing increasing headwinds due to a supply glut in Chinese real estate and growing debt burdens.  Evergrande Real Estate Group Ltd., a Chinese developer that’s been on a buying spree this past year, had its ratings cut by Moody’s Investors Service after the builder announced a plan to issue dollar bonds. Chinese real estate sales increased in 2015, but the high interest costs developers pay on dollar denominated debts impacted their profitability. We have seen strong long-term demand to borrow Evergrande Real Estate Group Ltd.

Europe

European automakers are back in the spotlight.  Demand has been seen for Renault after news broke that they are being investigated over emissions tests.  This triggered demand for Volkswagen, who has already been found guilty of emissions fraud, and Fiat, after it emerged that they faked car sales. December car sales rose 16%, making 2015 the best year for the industry since 2009, but we expect negative sentiment to continue in the short term.

Troubled French oilfield surveyor CGG shares are in demand due to a highly discounted rights offer.  The company plans to raise €351 million to refinance debt and restructure the firm from a seismic acquisition company into an integrated geosciences group as exploration companies stall projects amid slumping oil prices.  Each CGG right entitles the holder to purchase 3 shares at €0.66 each, representing a 72% discount and 39% discount of the theoretical ex-right price at time of announcement on January 11th.  There is significant spread between the ordinary shares and rights lines as the recent sell-off indicates that the share price is at risk of dropping below the rights subscription cost.  Loan fees are expected to trade at high levels through the rights trading period and into February.