From the Securities Lending Trading Desk

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Two major deals are driving opportunities for lenders in the US, the deteriorating operating environment continues to negatively impact retailers in Hong Kong and banks are dominating the headlines in Europe.

Below please find the May 10 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 and fees have increased for Pilgrim’s Pride Corporation following the announcement of a special cash dividend.  Late last week Pilgrim’s Pride, the second largest chicken producer in the US, announced a special cash dividend of $2.75 to holders of record as of May 10. This immediately caused an increase in demand as brokers looked to replace QDI sensitive positions. Pilgrim’s Pride has also been a long term focus of directional demand due to volatile margins, fears of the bird flu, dependence on the US economy and its chicken consumption and finally, feed prices.

Borrowers are seeking Take No Action (TNA) shares of Baxter International Inc. as critical dates approach for their exchange offer of Baxalta Inc. Baxter has offered to exchange up to 12.8mln shares of Baxalta common stock at a 7% discount and 1.4026 exchange ratio cap. This is a small exchange offer, worth roughly $525mln, compared to previous offers that saw securities lending demand such as Synchrony Financial and General Electric which was valued at $23bln. Securities Lending clients that are able to guarantee a TNA election and no sale through May 25 have been able to lock in a cents per share bid.

Asia Pacific

The deteriorating operating environment continues to negatively impact retailers in Hong Kong. Falling visitor numbers from Mainland China, a stronger Hong Kong dollar and lower spending by both foreign and local consumers has resulted in declining sales and profit margins for leading retail operators. We continue to witness strong securities lending demand for Chow Tai Fook Jewellery and Sa Sa International, two companies that derive significant revenue from mainland Chinese customers.

A decision by authorities in the Zhejiang province in China to cut gas prices and distribution tariffs is expected to squeeze margins for leading distributors. Analysts expect that the measures, which were announced in April and which also include a retail price cap, could also be rolled out nationally given the prevalence of differences in tariffs in the natural gas market across the country. We have witnessed increased securities lending demand in recent weeks for shares of Towngas China, which has a strong presence in the country and, in particular, the Zhejiang province.

Europe

Securities lending demand has increased for Banca Monte Dei Paschi Di Siena as the share price rebounds after the firm announced positive first-quarter profits. The stock rose 6% after announcing that provisions for bad loans have declined to a four year low. Short sellers saw the price increase as an incentive to put on new shorts. The bank continues to look for a buyer to shore up its finances.

Italy’s Banco Popolare is aiming to launch offer a rights issue in first half of this year. Banco Popolare’s shareholders approved a €1bln share sale as the Italian regulator says that market conditions are unfavorable for capital raising. The company currently has no plans for a convertible bond sale and will present its business plan the week of May 16th.