From the Securities Lending Trading Desk

US and Canadian Flags

Depreciation in the Canadian dollar has sparked a recent flurry of M&A activity between American and Canadian companies.  Borrowers are also seeking shares of Sharp Corp on news that the firm is close to completing a $6 billion deal with Foxconn Technology Group.  Meanwhile in Europe, Seadrill remains hard to borrow following a surge in share price last week on rumors of a rescue.

Below please find the March 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.

Depreciation in the Canadian dollar has sparked a recent flurry of M&A activity between American and Canadian companies.  According to Bloomberg “American companies have devoted more dollars to Canadian acquisition targets this quarter than they have since mid-2014 (which was when Burger King and Tim Horton’s struck their $13 billion merger).”  The main deals driving this increase are US medicine distributor McKesson’s acquisition of Canadian drugstore chain Rexall Health and US home-improvement retailer Lowes’ plan to acquire Quebec’s RONA Inc. The decline of Canadian dollar is being driven by the decrease in oil prices — oil is Canada’s largest export — and the central bank’s decision to leave interest rates unchanged.

Fundamental demand has increased for Chesapeake Energy Corp. amid a rebound in share price as the company cooperates with an antitrust case.  Chesapeake’s share price has more than doubled over the past few weeks and much of that has come on the back of news that the natural gas driller has been granted immunity in a shale bid-rigging investigation. At the front of the investigation is former Chairman and Chief Executive Officer Aubrey McClendon who was accused of rigging auctions for drilling rights.  In a tragic turn, McClendon died in a single car crash on March 2. As the share price has rallied, some bearish investors see a new entry point to short Chesapeake as they question if the recent gains are warranted.

Asia Pacific
Australian miner Fortescue Metals Group Ltd has been rallying in 2016 amid an unexpected rise in the price of iron ore.  The price of iron ore has soared 18% this year despite predictions that low cost supply and poor demand would weigh on the price. Fortescue Metals’ share price rallied 18% in February, however it could decline in the latter part of the year as steel demand in China, which accounts for half of global supply, continues to shrink.  We have seen strong lending demand for Fortescue Metals.

Sharp Corp and Foxconn Technology Group are close to completing their $6 billion takeover deal.  Sharp Corp has been losing money for several years and its need for financial support set off the takeover battle last year between Foxconn Technology Group and government-backed Innovation Network Corp.  Sharp shares have risen since a deal was announced after declining for five of the past six years. We have historically seen strong lending demand for Sharp.

Seadrill’s share price surged last week on rumors of a rescue.  The Norwegian based offshore driller’s price more than doubled last week on news major shareholder John Fredriksen is preparing a bailout deal.  The news caused hedge funds looking to profit take and cover short positions to avoid a short squeeze.  Markit reports a decrease in short positions to 10% of market cap from November’s highs of 17%.  Seadrill remains a hard to borrow name with interest in liquidity remaining high.

UK Grocers are among the most shorted stocks in STOXX Europe 600.  UK supermarket retailers Ocado and Sainsbury have attracted increased short interest in the face of narrowing margins.  According to Markit data, Ocado’s short interest is at 22.5% — a record for the company.  Sainsbury’s takeover offer for troubled Home Retail Group faces competition as Steinhoff has made a higher all-cash offer.  Levels in Sainsbury have decreased slightly as the M&A speculation has tempered, while Ocado is trending upward in the hard to borrow category.