From the Securities Lending Trading Desk

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Securities in the banking sector are seeing demand in Europe and the US this week.  In Asia, borrowers are seeking shares of Hotel Shilla after the South Korean government took steps to liberalize the duty-free sector and extend licensing to one of Shilla’s competitors. 

Below please find the March 29 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

Merger news is spawning demand in the US.  BB&T Corp. and National Penn Bancshares Inc. have agreed to merge. National Penn shareholders can elect to receive 0.3206 of a share of BB&T common stock (valued at roughly $10.75 as of the close on March 28) or USD 13.00 in cash for each share of National Penn.  At BB&T’s current valuation, the favorable action from a securities lending standpoint is either “stock elect” or “take no action.”  The merger is expected to close on March 30.

As Energous Corp’s share price surges, bears are questioning if the valuation is warranted and sustainable.   Amid speculation the iPhone 7 will contain Energous’ technology, the share price has rallied roughly 140% from the 52-week low of $3.86 back on January 19.  Energous is in the R&D phase of developing technology that will allow smartphones and other handheld devices to charge via a wireless transmitter from up to 15 feet away.  While many of Apple’s competitors already contain some version of built-in charging, the iPhone still does not.  The recent rally has some short sellers questioning the sustainability of the rally as it is essentially based only on speculation at this point.

Asia Pacific

One of South Korea’s leading shipbuilding firms has come under close scrutiny after it was revealed last week that it may have hid losses in its 2013 and 2014 earnings.  An independent auditor requested Daewoo Shipbuilding & Marine Engineering, one of the nation’s leading shipbuilding firms, to revise its previous financial statements which some analysts believe could result in class-action lawsuits being launched against the firm.  We have witnessed long-term securities lending demand for Daewoo Shipbuilding, as well as some of its competitors, such as Hyundai Heavy Industries and Samsung Heavy Industries, as delays in overseas projects and declining orders as a result of falling oil prices continue to dent earnings.

Shares in Hotel Shilla fell sharply last week after reports in the media suggested that luxury brand makers are hesitating to operate in its newly opened duty-free shop in favor of rival firm Lotte World. The South Korean government has taken steps to liberalize the nation’s duty-free retail sector, including the extension of its license to Lotte World, which has resulted in lower earnings for large operators such as Hotel Shilla, the nation’s second largest.  We have witnessed strong long-term securities lending demand for shares of Hotel Shilla, which have declined by over 30% in the past year.

Europe

The Italian banking sector is experiencing its biggest bank deal since the 2007 Banca Monte dei Paschi di Siena deal.  Banco Popolare has agreed to buy Banca Popolare di Milano in an all-stock deal after winning approval from the ECB.  The ECB has been very vocal in encouraging Italian lenders to clean-up their balance sheets and consolidate through mergers.  Banco Popolare will undergo a capital increase prior to October in order for the merger to go ahead. Strong securities lending demand has been seen for both stocks.

European airline short-haul weakness, strong competition and currency gains have led to increased short interest in the sector. Gains from lower fuel prices and sales in foreign currencies may also diminish as fuel prices rebound.  European Fees and utilization have increased the most for mid-caps, including Norwegian Air, Air Berlin, Air France and SAS.