From the Securities Lending Trading Desk

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Charter Communications is in the spotlight as they move closer to gaining regulatory approval for their acquisitions of Time Warner Cable and Bright House Networks.  Demand has been strong for both the German and South African lines of Steinhoff International after the company announced a convertible bond offering.  Borrowers are also seeking shares in several Australian based niche exporters on news that recent tax changes in China on imported goods purchased online may have a negative impact on future sales. 

Below please find the April 19 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

Demand is strong for Charter Communications as they move closer to gaining regulatory approval for their acquisitions of Time Warner Cable and Bright House Networks.  An administrative judge in California urged regulators to approve the deals, citing the public’s best interest.  Charter has been in demand since the Time Warner merger was first announced in May 2015 and fee levels have ticked up since then. The deals would be the largest on record for Charter and would quadruple their subscriber base.  The Charter/Time Warner merger would be paid in cash and stock.  Charter will remain in demand as investors await final decisions from the U.S. regulator Federal Communications Commission (FCC) and Department of Justice.  Previously, the FCC had rejected Comcast’s offer for Time Warner since the combined company would control roughly 35% of the cable TV market, over the previously established 30% limit.

We are seeing fee levels spike for Solazyme amid a company name change and shift in focus from fuels and industrial businesses to selling algae oil to foods and health sciences industries.  The company will soon be known as TerraVia which will focus on food products and specialty ingredients.  The shift in focus is based on the promise of higher margins, despite lower volume when compared with their failing algae based biofuel business. The changes follow a shake-up in management, with the CEO and co-founder moving to chairman of the board and the company bringing in a new CEO.  Solazyme recently announced a $200 million, 5-year deal with Unilever in which they will supply the latter with renewable algae used in personal care products.  There has been strong demand for Solazyme as many of their competitors have gone out of business trying to compete against oil.

Asia Pacific

Shares in several Australian-based niche exporters tumbled early last week on concerns that recent tax changes in China on imported goods that are purchased online may have a negative impact on future sales.  Organic baby formula manufacturer Bellamy’s Australia and vitamin maker Blackmores saw a sharp sell-off in their shares before rallying towards the end of the week.  The Chinese government announced in March that some premium products may be subject to new e-commerce tax rules, amid a broader overhaul of its system aimed at making levies on products posted to shoppers from overseas more comparable with rates paid locally. We have witnessed increased securities lending demand in recent weeks for both Bellamy’s and Blackmores, which have both seen their share prices soar by over 200% in the past year on strong online demand from Chinese consumers for their products.

Australian miner Fortescue Metals Group is planning to reduce debt following the recent rally in iron ore prices.  Fortescue Metals announced that it is committed to cutting its $5.9 billion net debt after a rebound in global commodities. Oil has risen from the 13-year low it touched in January, while iron ore has rebounded above $60 a ton. Lowering interest payments is a key element in Fortescue Metals’ ability to cut production costs and bolster margins.  Following strong interest at the start of the year, we have seen declining lending interest in Fortescue Metals as the global commodities outlook improves.

Europe

Demand has been strong for both the German and South African line of Steinhoff International Holdings NV after the company announced a convertible bond offering. The retailer – who is buying European electronics chain Darty Plc – plans to sell €1 billion ($1.1 billion) of bonds that can be converted into equity to repay existing debt and fund share repurchases. The conversion price is expected to be set within a range of 40% to 45% of the average Frankfurt and Johannesburg share prices between the start of the offering and its issuance, according to Steinhoff.

French steel producer Vallourec’s rights commenced trading Monday with volatile arbitrage spreads between ordinary shares and rights lines.  The rights trade until April 22nd with the oversubscription ratio to be announced in late April. The desk is pricing trades to capture spread between the two securities and will accrue revenue for uplift on the rights oversubscription option. Utilization and fees for both are trading in the top-end range.