From the Securities Lending Trading Desk

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Tesla Motors is looking to acquire SolarCity Corporation, the largest US solar provider, which is generating demand for both firms.  Short interest in GungHo, a leading developer of internet games in Japan, has risen steadily in recent weeks.  Frontline, one of Norway’s largest crude carriers saw demand on the back of more volatile oil prices.

Below please find the June 28 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

Russell’s 2016 reconstitution is generating demand. We are seeing increased demand for names being added to or deleted from the Russell 3000 as long holders that track or loosely track the index adjust their holdings accordingly. This typically results in a squeeze in liquidity. Some of the most sought after names due to deletions in the rebalance include: Rex Energy Corporation, BioDelivery Sciences International, and Bonanza Creek Energy. Conversely, the names seeing the most demand due to additions in the rebalance include: Energous Corp, Seritage Growth Properties and Transocean Ltd.

Tesla Motors Inc. has offered a range of $26.50 to $28.50 a share for SolarCity Corporation, the largest US solar provider. The offer is roughly 50 percent less than where Solar City was trading six months ago. Musk claims that uniting Tesla and SolarCity is an obvious decision and would create an “integrated sustainable energy company.” However many investors are concerned that this is Musk’s effort to bail out the struggling Solar City and Wall Street analysts have been downgrading Tesla since the announcement. There is much streetwide speculation that shareholders will not approve this merger. Fee levels have been trending higher for both Tesla and Solar City since the news first broke.

Asia Pacific

Short interest in a leading developer of internet games in Japan has risen steadily in recent weeks as one of its main shareholders finalizes the reduction of a major stake in the company. Earlier this month, SoftBank Group, the technology and telecoms giant, announced that it would seek to raise ¥73 billion ($699 million) through the sale of a large portion of their holdings in GungHo Online Entertainment, in an effort to strengthen its own finances and repay debt. The transaction is expected to be completed next month. We have witnessed strong securities lending demand for GungHo in recent weeks, as the company also announced a downward revision to its first half 2016 operating profit forecast by 37% to ¥26.3 billion ($252 million) as a result of declining sales and higher operating costs.

Hyundai Merchant Marine Co surged in Seoul trading after announcing plans to seek membership in the world’s largest shipping alliance. Korean shipbuilder Hyundai Merchant Marine Co and bigger rival Hanjin Shipping Co Ltd both remain unprofitable and are taking steps to restructure debt and sell assets to improve their balance sheets. Overcapacity and slowing global trade have led to a prolonged downturn in shipping rates. We have seen long-term lending demand for Korean shipbuilders.

Europe

Demand for Beverage Distributor Rexam peaked last week as the closing of a tender offer from the US’ Ball Corp rapidly approaches. The deal marks the largest transaction in Ball Corps’ history. The deal is expected to close on June 30, and interest is expected to remain constant until that point.

Frontline, one of Norway’s largest crude carriers saw demand on the back of more volatile oil prices. While Frontline has been in demand from hedge funds for quite some time, its recent rally spurred a new wave of interest.