From the Securities Lending Trading Desk

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Merger arbitrage is driving hedge fund demand in the US while European short sellers remain unfazed despite a recovery in equity prices.  Out of Asia, borrowers are seeking shares of Toshiba and Gome Electrical.

Below please find the May 3 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.


Intrexon Corporation has been the focus of demand amid bearish reports and speculation the recent price rally was overdone.  In the first quarter of 2016, Intrexon rallied roughly 80% on speculation the company’s genetically modified mosquitoes could be used to combat the Zika virus. In April, bearish reports were published speculating that the firm was overstating revenues and that only a small percentage of those revenues are generated by their own products.  Intrexon and other bullish investors have said these claims are based on cherry picking information in an effort to create a negative impression of the company. Roughly 35% of Intrexon shares are currently sold short.

Merger arbitrage is driving hedge fund demand for Anchor BanCorp Wisconsin Inc.  According to Bloomberg, merger arbitrage strategies, which generally bet that a target company’s shares will climb toward the offer price and the bidder’s will fall, are among the best performers this year, returning 1.3% in the first quarter, while the industry overall is slightly down. This week Anchor merged with Old National Bancorp, creating strong demand for Anchor. Old National offered 3.5505 shares of itself for every share of Anchor or $48.50 cash. Anchor traded as high as $47.40 on April 27 — a 7% increase from when the deal announced.

Asia Pacific

Problems continue to mount at Toshiba Corp after it revealed last week that it would make provisions for a larger than expected loss for the fiscal year ending in March.  The Japanese electronics conglomerate, which has been reeling from revelations last year that that it had inflated net profits by $1.2bln over a period of seven years, forecasted an operating loss of ¥690bln ($6.2bln) against a projected amount of ¥430bln. We continue to witness securities lending demand for Toshiba, which was also forced to write down the value of its stake in US nuclear unit Westinghouse by approximately $2.3bln as a result of lower credit ratings and increased funding costs following on from the accounting scandal.

Chinese retailer Gome Electrical Appliances projected a drop in first quarter profit as a result of implementing a strategic transformation plan.  Gome Electrical forecasted a profit drop of 30-35% and was downgraded by analysts due to the pessimistic outlook. We have seen increasing lending demand for Gome Electrical.


Short interest has waned on popular short, Kuka.  Kuka, the German robotic manufacturing engineer, has seen a 34% increase in value since the turn of the year due to surging sales and earnings growth. Short interest became apparent in 2014 when the firm’s stellar growth numbers were outweighing their industrial peer group.  Later in 2015, short interest spiked when a drop in Chinese vehicle manufacturing threatened Kuka’s forecasts. This has failed to stop Kuka’s run and short coverage has dropped to 10% of shares outstanding from highs of 17%.

Despite an equity rally, European short sellers are not fazed.  Contrary to what we’ve witnessed in the United States, short sellers in Europe have been more reluctant to close positions amidst the recovery in energy and commodity prices.  According to Markit, average short interest across constituents of Europe’s Stoxx 600 has jumped 30% higher in 2016, despite the index recovering 16% since mid-February.  European energy companies have seen some covering, but the sector remains the second most shorted overall in the Stoxx 600. Food and staples retailing remains the shortest sold sector in Europe despite the sector moving 11% higher, on average.