From the Securities Lending Trading Desk

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Convertible bond activity has spurred securities lending demand for Luxembourg-based Grand City Properties.  In the US, last week’s gains in the equity markets didn’t discourage bearish investors from maintaining their short positions.  Meanwhile, demand has increased for Standard Chartered Plc after the bank surprised analysts by reporting a larger than expected $2.36bln dollar loss last week.

Below please find the March 1 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
Last week’s gains for US equity markets didn’t discourage bearish investors from maintaining their short positions.  Since falling to a two-year low of 15,600.18 on February 11, the Dow Jones Industrial Average has rallied over the past two weeks.  The rally hasn’t caused short sellers to back off their positions — short interest is only 1% off the four year high, according to Markit.  The global provider of financial information services went on to report that “Chesapeake Energy and Freeport-McMoran have actually seen a rise in demand to borrow as shorts doubled down in the wake of the recent rally.  In related news, this week David Kostin, chief US equity strategist for Goldman Sachs Group Inc. released the “Hedge Fund Monitor” which said “hedge funds have slightly outperformed the S&P 500 so far in the dire start to 2016” and that part of this is due to “dropping net long exposure to 45 percent, the lowest since 2012, as they look to shed risk.”

Demand was strong for SeaDrill Limited ahead of its earnings announcement.  SeaDrill, the third-largest offshore driller by sales, has struggled as oil prices continue to fall.  The firm’s share price is down roughly 80% since 2014.  Investors remain concerned there are more headwinds in the future as industry struggles don’t show any improvement and SeaDrill specifically tries to manage their own hurdles such as operating performance and financial leverage.

Asia Pacific
Noble Group’s woes showed no signs of abating after two major credit ratings agencies expressed further concern last week about the state of the company’s finances.  The Singapore-listed commodities dealer, which on Thursday announced a net loss of $1.67bn for the full-year 2015, has been struggling of late due to the prolonged slump in commodities prices and spiraling borrowing costs due to credit rating downgrades by both Moody’s Investor Service and Standard & Poors in recent months.  We continue to witness robust securities lending demand for shares in Noble Group, which have declined by over 60% in the past year.

Standard Chartered Plc surprised analysts by reporting a larger than expected $2.36bln dollar loss last week.  The bank said its bad loans had increased by 87% due to falling commodity prices and large exposure to emerging market currencies.  Standard Chartered is in the process of streamlining its businesses amid a restructuring prompted by a change in management last year.  We have witnessed an increase in demand to borrow Asian listed financial securities in the past few weeks, including Standard Chartered, amid heightened volatility in emerging markets.

Europe
Delta Lloyd cut its rights issue from €1bn to €650mn after opposition from shareholders.  Delta Lloyd shares rallied 17% last week after it was announced that the Dutch insurer’s rights issue will be less dilutive than originally planned. The rights issue and other measures may boost the company’s solvency ratio to 155-175%. The rights issue has been submitted for shareholder approval at the March 16th Extraordinary Shareholder Meeting.  Borrowing demand has decreased slightly and fees are in the mid-level range; this may increase heading into the springtime rights offering.

Convertible bond activity has spurred securities lending demand for Grand City Properties.  The company announced a €450 million convertible bond which was placed with institutional investors at a conversion premium of 45% above the volume weighted average price between launch and pricing.  Proceeds will be used to fund the company’s growth strategy and/or repayment of loans.