From the Securities Lending Trading Desk

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Borrowers are seeking the Hong Kong listings of HSBC Holdings Plc and Standard Chartered Bank Plc due to their exposure to the UK economy.  In deal and IPO news, Italian financial holding company Italmobiliare has announced a savings share conversion, spinoff and special dividend while US software maker Twilio made its trading debut on June 22.

Below please find the July 5 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
We are seeing increased demand for Diamond Resorts after they agreed to a deal with Apollo Global Management. The all-cash offer equates to a 26% premium on Diamond’s closing price on June 28. Shareholders will require more than 50% of the company’s common shares to be tendered. If approved, the transaction is expected to close in the next few months. Fee levels ticked slightly higher as borrowers looked to protect their positions ahead of possible recalls.

Twilio, a software maker whose products help companies like Uber and Nordstrom communicate with their customers, made its trading debut on June 22. The share price has rallied nearly 150% from the IPO price of $15. We typically see strong demand for IPOs as brokers running the offer look to make delivers, however we also see demand if the price shoots up and investors question the company’s valuation. In the case of Twilio, some investors are concerned that, despite revenue growth of nearly 100% last year, the growth rate has fallen roughly 70% year to date. In addition, the company has consistently reported losses of $6-10 million per quarter and investors are skeptical of increased revenues in the near term. In general, initial public offers for US companies have fallen 52% so far this year compared with the same period in 2015.

Asia Pacific
Several UK based banks have come under increased pressure in the aftermath of the United Kingdom’s vote to leave the European Union. In the past week we have witnessed strong securities lending demand for the Hong Kong listings of HSBC Holdings Plc and Standard Chartered Bank Plc due to their exposure to the UK economy. HSBC, which generated about a third of its 2015 revenue in Europe, was particularly hard hit as its shares fell by over 9% in the aftermath of the vote before posting a minor rally towards the latter part of the week. Analysts have expressed concerns that HSBC would be particularly exposed in any post-Brexit recession in the UK because of a likely jump in unemployment and slumps in housing prices and sterling.

The planned takeover of one of China’s biggest cement producers by one of its larger rivals has collapsed. West China Cement, the largest cement producer in northern China’s Shaanxi province, announced late last week that its deal with Anhui Conch Cement would no longer proceed as various conditions, including regulatory approval, were not met by the June 30th deadline. The deal was expected to increase efficiencies for West China Cement and help bolster its ability to borrow given Anhui Conch’s higher credit rating. We have witnessed long term securities lending demand for West China Cement, whose shares tumbled by 33% last Tuesday.

Europe
Italian financial holding company Italmobiliare has announced a savings share conversion, spinoff and special dividend. Savings shareholders will receive 1 common share for every 10 savings shares. For every 10 savings shares, holders are entitled to €56 plus 3 HeidelbergCement common shares. The restructuring was announced after the close on Friday and we expect demand to be robust depending on taxability of distribution and spread between lines.

Short sellers have underperformed following the Brexit. According to Markit, the average price drop in the top 10% most shorted Stoxx 600 constituents was 5.6%. This is 0.5% less than the average price fall in the index, meaning the most shorted components actually outperformed the group. Short bias was also down heading into the Brexit vote  — average short interest in the Stoxx 600 fell 5% in the ten days leading up to the referendum. The covering heading into the vote demonstrates that the Brexit result caught short sellers by surprise.