From the Securities Lending Trading Desk

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Nordic American’s share price is rallying, but some bearish investors are calling for a correction as the company struggles with numerous headwinds including declining Suezmax rates and the need for a newer fleet. Securities lending demand has also been strong for Prada SpA on rumors that the luxury goods maker may be a takeover target. In Europe, directional conviction remains high for Casino Guichard.

Below please find the March 15 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

As Nordic American Tankers rallies, some investors question if the shares price is overdone. Nordic American is a shipping company that owns and charters Suezmax tankers for oil transportation and, as a result, its value is closely correlated to the Oil and Gas sector which has been one of the largest focus sectors of 2016. According to some bearish investors, Nordic American is headed for a dramatic correction as the company struggles with headwinds including declining Suezmax rates, competition, difficultly maintaining their dividend and the need for a newer fleet. Nordic American recently released a letter to sharesholders suggesting investors should not be concerned with declining oil prices as the company is not directly in that business and further suggests a surplus of oil must be transported and stored, which is beneficial to tanker owners.

A recent rally and subsequent drop in Rockwell Medical’s share price is fueling bearish sentiment for the pharmaceutical company. After falling to a multi-year low of $5.85 on February 8, Rockwell’s stock price had a fast run up to $9.60 ahead of earnings on February 29. Those gains have not been sustainable, with the shares price averaging about $6.26 in March. Throughout 2015 and now 2016, there has been strong fundamental demand for pharmaceuticals, biotech and health care. Stock values in these sectors have historically been greatly affected by clinical trial failures or delays, competition, and regulatory obstacles and other news events. Recently, it was reported that Rockwell is the focus of an investigation as to whether the board has breached its fiduciary duties to shareholders.

Asia Pacific

Shares in the Hong Kong listing of Prada SpA encountered a roller-coaster ride last week after reports suggesting that one of its rivals may be a takeover target. An article in the Financial Times cited that British luxury brand Burberry Group was facing an unsolicited takeover by a mystery investor that had built up a stake in recent weeks, leading some analysts to suggest Prada could be next in line for a takeover. Shares in Prada rallied as much as 22% before falling sharply towards the end of the week. We have witnessed strong securities lending demand for the Italian luxury goods manufacturer, which has seen its share price decline by over 40% in the past year on concerns over revenue growth and slowing sales, particularly in China.

Korean pharmaceutical manufacturer Celltrion Inc’s shares fell sharply early last week after the publication of a negative research report alleging widespread accounting fraud at the company. The report, which was written by Ghost Raven Research, an anonymous team of researchers and forensic investigators, alleged that Celltrion’s actual revenues are 90% below what the company claims and its expenses have been understated by over 50%. We continue to witness robust long-term securities lending demand for Celltrion, which has seen its share price rally by over 20% this year after its experimental copy of Johnson & Johnson’s best-selling rheumatoid arthritis treatment Remicade won the backing of US regulatory authorities.

Europe

Arcellormittal has announced the terms of a €3bln rights issue. The world’s biggest steel producer, who has already scrapped its dividend, is asking shareholders for a cash injection to pare its $15.7bln debt pile. The company has slumped by 55% in the last year after reporting a $7.9bln loss in 2015. The rights will trade alongside the ordinary shares from the March 15th through to March 29th. The desk will be vigilant for any pricing differential between the lines and re-rate accordingly.

Casino Guichard Perrachon reported a 35% drop in full year earnings as Brazil’s economic slump hurts sales. The French retailer recently targeted by Carson Block’s hedge fund vehicle Muddy Waters is coming under increased pressure to reduce its debt pile, while margins in the domestic French markets are under attack from weak consumer spending. Directional conviction for Casino remains high and the desk is actively monitoring liquidity.