From the Securities Lending Trading Desk

cargo ship full of containers

Borrowers are seeking shares of Japan’s biggest marine shippers after the firm incurred its first loss in 36 years. Meanwhile in the UK, Brexit has put UK property firms in focus. In the US, Lockheed Martin announced plans to split off Abacus Innovation Corp to Leidos Holdings driving demand for both Lockheed and Leidos.

Below please find the July 19 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

As Lockheed Martin announced plans to split off Abacus Innovation Corp to Leidos Holdings there was strong demand for both Lockheed Martin and Leidos Holdings. The exchange offer provides Lockheed Martin stockholders with the opportunity to exchange their Lockheed Martin common stock for shares of Abacus common stock, which will convert into shares of Leidos common stock upon completion of the merger. The exchange and the merger are expected to be tax-free to participating Lockheed Martin stockholders for US federal income tax purposes, except for any gain or loss attributable to the receipt of cash in lieu of fractional shares in the merger. Clients who are able to guarantee the favorable elections and no sell through 8/22 (the expiration plus protection period) can negotiate a cent per share payment.

Fee levels for XBiotech Inc are elevated as a weighting change, due to the Russell Reconstitution and price volatility, had many brokers scrambling for shares. On 7/1, XBiotech Inc. rallied to a 52-week high of $24.90, climbing roughly 50% in June. However since that high, the share price has been unable to sustain those gains falling as low as $14.78 on 7/7. The share price has been extremely volatile amid a highly questionable analysis of the phase III trial, which failed to convince investors about the efficacy of the cancer drug. As demand continues to be strong and liquidity is tight, fee levels remain high. Stock values in the pharmaceutical sector have historically been greatly affected by clinical trial failures or delays, competition, and regulatory obstacles and other news events.

Asia Pacific 

BYD Co Ltd announced that a Chinese bus operator cancelled a major portion of a 1.8 billion yuan ($270 million) order for electric buses. BYD Co Ltd has been attempting to diversify its product offering into commercial vehicles such as buses, forklifts and motorised road sweepers as competition increases in the passenger vehicle market. After selling the highest number of electric vehicles in China last year, BYD Co Ltd is also diversifying into monorail system construction due to the lower level of competition in that sector. We have seen long term lending interest in BYD Co Ltd.

Continued sluggishness in global trade and concerns over the global economic climate is forcing one of Japan’s leading marine shippers to undergo restructuring of its business. Earlier this year, Kawasaki Kisen Kaisha Ltd, or K-Line, recorded its first losses in 36 years in its dry-bulk unit as freight rates continue to slump. Years of overcapacity in the industry is forcing the shipper to reduce its workforce and explore consolidation within the industry. We have witnessed strong securities lending demand for K-Line in recent months.

Europe 

Brexit prompts short sellers to increase UK property bets. Investor withdrawals have caused real estate funds to sell properties to improve liquidity. Short sellers are positioning that these sales will prompt share prices to fall further. According to Markit, average short interest in UK real estate firms has spiked 28% since the UK referendum. Demand to borrow Intu Properties, Capital & Counties, and Hansteen Holdings has increased over the past two weeks.

Securities lending demand has been reignited for Swatch after the company missed first-half profits, causing the share price to plunge upon the announcement. Falling demand in the luxury goods sector in key markets such as Hong Kong and spreading to France and Switzerland, along with maintaining staff despite lower orders, are the key drivers for the 60% fall in profits