From the Securities Lending Trading Desk

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M&A continues to dominate the headlines.  This week, we highlight six major deals underway in Europe and the US.  Demand in Asia remains focused on the duty-free sector and troubled airbag manufacturer Takata.

Below please find the May 24 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 continues to drive demand in the US. Last week there was increased demand for Range Resources Corporation after it announced plans to acquire Memorial Resource Development Corp. The merger will be all stock and is expected to close in the second half of this year. Separately, Baxter International completed their spin-off of Baxalta. Take No Action (TNA) was the desired election from a securities lending standpoint and bids climbed higher in the final days before expiration. Also, there was initial demand for Anacor Pharmaceuticals amid news the company is being purchased by drug giant Pfizer for $5.2bln in cash. Demand quickly fell off as the all cash aspect of the deal leaves little securities lending opportunity.

Fee levels are spiking for Square Inc. as the share price plummets following the lockup expiration. On April 12, Square closed at an all-time high of $15.48 per share, however the stock price has fallen roughly 40% since the lockup expiration on May 16, when many holders gained the ability to sell shares. According to analysts, stock prices often fall during this period due to uncertainty. Square’s biggest rival is PayPal and Square is largely considered an underdog in the industry. Square remains unprofitable; the company has struggled to overcome very thin margins. Recently, Square’s GAAP net loss widened from $48mln a year ago to $96.8mln.

Asia Pacific

The continuing slowdown in the Chinese economy and a strengthening Japanese yen has had a negative impact on one of Japan’s leading duty free operators.  Laox Japan, has seen sales soar during the past 18 months as a result of strong visitor numbers from China, in part due its close alliances with travel companies on the mainland.  Last week, however, the firm reported a loss of ¥424mln ($3.9mln) for the first quarter of 2016. Analysts attributed the poor earnings to a steep fall in average consumer spending, from ¥38,000 to ¥28,000 per visitor, in part due to the recent strengthening of the Japanese yen. We are witnessing strong securities lending demand for the duty free operator, which has seen its share price tumble by over 75% in the past year.

Japanese airbag manufacturer Takata Corp’s bonds fell to record lows following the expansion of a US airbag recall and a ratings downgrade. The US National Highway Traffic Safety Administration ordered Takata to replace as many as 40mln additional airbags linked to deadly malfunctions. The airbag maker reported a net loss of ¥13.1bln ($120 mln) in the fiscal year that ended in March, compared with an initial projection for a ¥5bln profit. It is forecasting a profit of ¥13bln for the current year. We have seen strong long-term interest for Takata Corp.

Europe

It was a mega merger week which saw securities lending demand increase for Bayer, Technip and Kuka. Monsanto Co. is reviewing a takeover proposal from Bayer. Monsanto, which has a market value of $42bln, is working through the offer with financial and legal advisers. Technip SA and FMC Technologies Inc. agreed to merge in an all-stock deal, creating a $13bln company as the oil-services industry responds to crude’s collapse. They expect the combination to deliver at least $400mln in annual pre-tax savings in 2019. Finally, Midea Group Co. is seeking to raise its stake in Kuka AG to become the industrial robot maker’s largest shareholder in a deal that values the German company at $5.2bln. Kuka stated that its boards would evaluate the offer.

Rights issues may be on the horizon in Poland for Alior Bank and coal miner JSW. Troubled coal miner JSW may require a rights issue to shore up its balance sheet by year-end. The Polish state may not participate in the offer, which would drop its stake below 50%. Alior Bank announced plans to raise 2.2bln zloty via a rights issue, set at 38.9 zloty per share. The firm will not pay a dividend from 2016 earnings and the 2017 dividend is in jeopardy. The Alior rights issue is unique because it has a two-day trading period, which has softened demand compared to rights names which typically trade for two weeks. Both stocks are trading in the medium-hard to borrow range.