From the Securities Lending Trading Desk

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Despite a rally in iron ore prices, demand has deepened for European steel producers. Out of Asia, the world’s second largest builder of oil rigs warned investors of more difficulties ahead for the industry as a result of the continued softness in oil prices.  In the US, fee levels are spiking for Diplomat Pharmacy, Inc., the nation’s largest independent specialty pharmacy, on share price volatility and bearish sentiment.

Below please find the February 23 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

Directional demand remains strong for Sears Holdings as investors question if the company is still viable.  The securities lending desk has seen fee levels tick up for Sears as the share price declines, closing at a 52-week low of $15.01 on February 10.  Analysts have suggested that Sears Holdings is not a sustainable company in its current form.  Sears, the department-store chain run by hedge-fund magnate Eddie Lampert, is struggling with narrowing gross margins, growing debt and liquidity concerns.

Fee levels are spiking for Diplomat Pharmacy, Inc., the nation’s largest independent specialty pharmacy, on share price volatility and bearish sentiment.  Fourth quarter and year-end 2015 operating results are expected to be released at the end of the month and some investors are questioning if recent gains are sustainable. After falling to a 52-week low of $24.39 on October 22 of last year, Diplomat has rallied more than 30%.  There are concerns regarding Diplomat’s ability to sustain revenue growth — which had greatly exceeded the industry average — as well as the previous 59% increase in revenues from the same quarter one year prior.

Asia Pacific

Short positions in Hong Kong stocks have surged in 2016 and overseas investors are cashing out of ETFs, data from Markit shows.  The Hang Seng index has fallen 12% in 2016 due to heightened global concerns surrounding the state of the Chinese economy.  Markit data shows that outflows across foreign listed ETFs exposed to the region have surged to $460 million year to date. Hong Kong short interest has been highest in the Real Estate, Software, Mining and Service sectors.

The world’s second largest builder of oil rigs warned investors of more difficulties ahead for the industry as a result of the continued softness in oil prices.  Last week Sembcorp Marine Ltd reported a net loss of S$537 million ($384 million) for the last quarter of 2015 as it set aside higher impairment charges and provisions for costly overseas projects, including one for its Brazilian client Sete Brasil Participacoes SA.  We have witnessed robust lending demand in recent months for Sembcorp Marine as they cited customer orders for oil rigs continue to decline and that the recovery in the sector may take longer than expected.

Europe

Securities lending demand has increased for Anglo American after the stock was downgraded to junk.  Anglo American has plans to sell assets to absorb losses and to cut their debt.  The continued sell off in commodity prices, specifically metal, has put the company under enormous pressure and continues to erode their cash flow.

Despite a rally in iron ore prices, demand has deepened for European steel producers. High operating leverage continues to stress European steel makers.  Arcelor Mittal and Vallourec have taken steps to fortify their balance sheets and weather the storm by proposing rights issuances.  Kloeckner, SSAB and Acerinox continue to trade at heightened levels.