From the Securities Lending Trading Desk

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Kuka, the German manufacturer of industrial robots, is back in short sellers’ sights. There has been strong directional demand for Coty Inc. amid expectations that the firm will merge with Procter & Gamble Co. in a Reverse Morris Trust. Borrowers are also seeking shares of Virgin Australia Holdings after the firm announced a deeply discounted rights issue.

Below please find the June 21 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

There has been strong directional demand for Coty Inc. amid expectations that the firm will merge with Procter & Gamble Co. in a Reverse Morris Trust. By definition, a Reverse Morris Trust is when a parent company, in this case Procter, has a subsidiary that it wants to sell in a tax-efficient manner, here it would be Galleria Co. The parent company (Procter) completes a spin-off of a subsidiary to the parent company’s shareholders. The former subsidiary (Galleria) then merges with another company (Coty) to create a merged company. Coty has been a strong focus of interest since November 2015, but rates started spiking in March 2016. The transaction is expected to close in October 2016.

Bears have increased positions in Alibaba. This month we have seen more brokers taking down positions in Alibaba Group Holding Ltd. which we attribute to many reasons. Demand is potentially being driven by large holders of Alibaba who are looking to reduce their stake in the Chinese e-commerce giant. Softbank recently announced plans to sell a stake worth roughly $10 billion and Yahoo has hinted at potentially selling some of their holdings. Softbank expects profits of up to $2.4 billion on the sale. In addition, recent news that the SEC is investigating Alibaba has created cause for concern among some investors. Finally, the slowdown in China overall remains a broader worry for investors, but has specific implications for Alibaba.

Asia Pacific

MSCI Inc announced for a third time they will not be adding Chinese equities to their benchmark indexes. The index compiler announced that Chinese policy makers need to make additional improvements to the accessibility of the A-share market before they will consider including Chinese shares. China was rejected despite taking steps to address MSCI’s concerns, including curbs on arbitrary trading halts and looser restrictions on cross-border capital flows. MSCI will review the inclusion of A-Shares again in 2017. A viable offshore lending model for A-Shares does not currently exist, however the inclusion of A-Shares to the MSCI indexes could increase the likelihood of a workable model emerging.

Virgin Australia Holdings announced it will raise $852 million in a deeply discounted rights issue, plus reduce costs as part of a plan to cut its debt and improve earnings. According to the announcement, the cost-cutting drive would likely result in some job losses, but the company would benefit from a fall in its interest costs and a potential re-rating from credit rating agencies. Demand has increased for Virgin Australia Holdings.

Europe

Ocado and Tesco are most under threat from Amazon’s success in online retail. Securities lending demand has been seen for both Ocado and Tesco due to the potential slowdown in sales growth if AmazonFresh proves successful. More limited demand has also been seen for Sainsbury’s and WM Morrison, given they are both less reliant on online sales.

Kuka, the German manufacturer of industrial robots, is back in short sellers’ sights. Securities lending demand has returned for Kuka after the firm announced that it is looking to preserve German jobs following an offering of €115/share from Midea Group, China’s biggest appliance manufacturer. Government officials are concerned about Midea’s longer-term intentions and wants to encourage a European partner to step forward.