From the Securities Lending Trading Desk

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A shift in consumer tastes, combined with intensifying competition from its rivals, is driving demand for the world’s biggest noodle maker.  The US desk has seen strong demand for consumer finance stocks amid concerns regarding increased scrutiny and regulation.  In Europe, demand continues to be strong for the banking sector following the release of details around Banco Popolare’s €1bln rights issue.

Below please find the June 7 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

The desk has seen strong demand for consumer finance stocks amid concerns regarding increased scrutiny and regulation. Last month LendingClub Corp, one of the largest online lending services, reported that an internal investigation had revealed $22mln of near-prime loans was sold to a single investor and violated business practices. Shortly afterwards, the New York Department of Financial Services (NYDFS) announced a probe into LendingClub, as well as a review of other online lenders. LendingClub, LendingTree and On Deck Capital all plunged following the news. Utilization and fee levels have ticked up for all three stocks.

Increased fundamental interest is surrounding retailers. Consumer spending has been hurt by slowing worldwide economies. This, coupled with competition from discount and online retailers, has eroded gross sales. We have seen strong demand for Nordstrom Inc, JC Penny Co, and long-time short Sears. According to reports, Nordstrom is the largest short in the group with short interest of over $1.3bln. Sears is currently the most expensive borrow of these names and has been a focus of directional demand since 2007.

Asia Pacific

Noble Group Ltd announced that Yusuf Alireza has resigned as Chief Executive Officer and approved a rights issue to raise about $500mln with support from China’s sovereign wealth fund.  Noble Group has been under intense pressure for more than a year as the commodity rout spurred losses. In the past 12 months, Noble Group sold its agriculture unit stake to raise funds, was attacked by critics over its accounting practices and its credit rating was cut to junk. We have seen strong long-term lending interest for Noble Group.

A shift in consumer tastes, combined with intensifying competition from its rivals, has sent shares in the world’s biggest noodle maker into a tailspin in the past year. Tingyi (Cayman Islands) Holding Corporation announced worse than expected first quarter results last week and was forced to revise down its full year earnings estimates as sales from its instant noodle business, which accounted for approximately 40% of total revenue in 2015, declined by 16% in the first quarter of 2016. A stagnating market for noodle consumption and reduced demand for Tingyi’s bottled water and juices in mainland China is also negatively impacting turnover. In recent weeks we have witnessed increased securities lending demand for shares in Tingyi, which has seen its share price tumble by nearly 60% in the past year.

Europe

Securities lending demand continues to be strong for the banking sector following the release of details around Banco Popolare’s €1bln rights issue. The board of directors approved the issuance of 465,304 new Banco Popolare ordinary shares to shareholders at €2.14 each at an allotment ratio of nine shares for every seven Banco Popolare ordinary shares. This represents a discount of nearly 30%. The rights issue is a significant component of the merger with Banca Popolare di Milano, which is being driven by the need to meet the ECB collateral requirements.

Cobham struggles as rising debt and slow growth takes its toll. Demand has been seen for the UK manufacturer of aerospace, defense and electronic industries after announcing the need to raise £506.7mln via a rights issue. New stock will be issues at a discount of currently 35%.