From the Securities Lending Trading Desk

Coal Miner Illustration

Peabody Energy Corporation, which has seen long-term directional demand, remains in focus amid bankruptcy concerns. Meanwhile in Asia, borrowers are seeking shares of Toshiba Corp. on the news that US officials have launched an investigation into claims that it hid $1.3 billion in losses at its nuclear power operations. In Europe, allegations of fraud have increased demand for Wirecard.

Below please find the March 22 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

Rebounding oil prices and short squeeze pressure caused fee levels for Chesapeake Energy Corp to decline roughly 75% last week. Since falling to a low of $1.59 on February 12, Chesapeake’s share price has more than doubled. As a result, some short sellers have been forced to close out their short positions which has only added to the upward pressure on the stock. Despite the recent gains, there are still concerns as to whether they are warranted as Chesapeake remains vulnerable to several factors, including profit taking and crude oil prices.

Peabody Energy Corporation, which has seen long-term directional demand, remains in focus amid bankruptcy concerns. The US coal industry has been in dire straits for years as firms struggle with massive debt loads, ever growing environmental regulations, falling demand and increased competition from natural gas. The combined market capitalization of US coal miners has plunged from “over $70 billion in 2011 to barely $6 billion” based on Bloomberg data. Over the past year Peabody, the nation’s biggest miner, has seen many rivals file for bankruptcy and its stock value has declined by much as 98%. Despite trying to tap the financial and capital markets for rescue, Peabody’s $6.3 billion in debt is proving a difficult obstacle to overcome.

Asia Pacific

Toshiba Corp shares fell sharply last week on the news that US officials have launched an investigation into allegations it hid $1.3 billion in losses at its nuclear power operations. Toshiba announced last week that it sold a medical equipment unit to Canon Inc for ¥665.5 billion ($5.9 billion) to help revive profits after an accounting scandal left the conglomerate facing record losses, job cuts and potential spin-offs. The sale of the medical unit will enable Toshiba to avoid additional fund raising to combat the legal issues it faces from the probe. We have seen strong long-term lending interest in Toshiba.

Shares in CAR Inc. fell sharply last week after one of its major shareholders agreed to sell a large stake in the Chinese car rental firm. Hertz Global Holdings Inc. raised approximately $240 million in the deal with UCar Technology that would reduce its ownership in CAR from 10.23% to just 1.73%. The deal comes hot on the heels of a recent credit downgrade to “negative” from “stable” by Moody’s Investor Services. We have witnessed strong long-term securities lending demand for CAR, which has seen its share price decline by approximately 38% in the past year.

Europe

The short covering rally in offshore drillers has led to volatility in fees for Transocean. Transocean said the oil drilling sector is enduring its most challenging market in 30 years, but the industry’s nature will likely yield a recovery and drive demand for its assets and services. The desk has seen overall fees soften, but utilization remains high while the stock is re-balanced on indices and de-listed from the Swiss exchange.

Allegations of fraud have increased demand for Wirecard. Zatarra released a report accusing the payment processing company of financial fraud. Zatarra claims that they have uncovered evidence that Wirecard has been laundering betting proceeds from offshore poker sites back into the United States, where online gambling is illegal. Wirecard has become one of the most heavily shorted companies in Europe with fees climbing.