From the Securities Lending Trading Desk

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There has been a strong directional demand for shares of US Company, SunPower, after its share price plunged 30% in one day. In China, the focus on property stocks continues to rise with Evergrande Group announcing plans to take a 4.68% stake in the Chinese residential developer, China Vanke Co. Meanwhile in the UK, Poundland sees an increase in demand after South African company Steinhoff raises its offer.

Below please find the August 16 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 

A spike in bearish sentiment for shares of Shake Shack Inc. Last week the company’s stock plummeted the most in five months after same-store sales missed analysts’ estimates, signalling that the fast expanding burger chain is not protected against a slump that is quickly spreading through the fast-food industry. Sales at locations open at least 24 months rose 4.5% in the second quarter. That marks a slowdown from the 9.9% gain the chain posted in the prior quarter, and trails the 5.4% increase analysts had expected. The company has relied heavily on new stores to help increase revenue but analysts warn the restaurant sector is facing a difficult environment and may be headed into a recession due lower consumer spending.

Directional demand is on the rise for SunPower after their stock price plunged 30% in one day due to a downbeat outlook. Last week the company announced they will lay off 1,200 employees and lower-than-expected guidance for the year. SunPower stated they now expect to lose up to $175 million in 2016, compared to its expectation in May to earn up to $50 million. The news triggered several analysts to quickly cut its rating on the stock. The increase in short interest coupled with limited streetwide liquidity has pushed fee levels higher.

Asia Pacific

A reduction in demand and falling prices is compressing earnings for one of China’s leading manufacturers and distributors of fertilizers. Sinofert Holdings has been grappling with a combination of weak farm incomes, the government’s reinstatement of a value-added tax on fertilizers in September 2015 and a general slowdown in the Chinese economy. In response to these challenges, Sinofert has launched new technology offerings to boost farm efficiency as well as cut costs to help raise margins. We have witnessed an increase in securities lending demand for Sinofert in recent weeks, and seen its share price decline by over 30% in the past year.

The battle for control of China Vanke Co continued after China Evergrande Group announced plans to take a 4.68% stake in the Chinese residential developer. Guangzhou-based developer Evergrande Group bought China Vanke Co’s Shenzhen-traded shares through a unit for 9.1 billion yuan ($1.4 billion). Evergrande continues to accumulate A shares in Vanke to reach the 5% ownership threshold, where it could request a seat on the company’s board of directors. Property sector stocks have generally been in focus in Hong Kong following a recent 37% rise in the industry benchmark gauge. Lending demand for China Evergrande increased following the announcement.

Europe 

Melrose rights issue garners significant lending interest. UK investment firm Melrose Industries announced plans to acquire underperforming US manufacturer Nortek. In order to finance the purchase, Melrose issued rights to shareholders to sell shares at 95 pence. There is a modest spread between ordinary shares and rights, as well as demand to borrow rights for the oversubscription option. The desk has structured trades in several different structures to diversify the book and maximize revenue opportunity.

Demand materialised for the UK discount retailer Poundland after Steinhoff raised its offer. The South African company Steinhoff has continued its purchasing spree following an agreement to buy Mattress Firm Holding for $2.4billion. The offer for Poundland was raised by 5 pence after New York based Elliott accumulated a 17.5% stake in Poundland, which could pose a threat to approve the merger. The 227 pence offer includes Poundland’s 2 pence full-year dividend. The target company was advised by JPMorgan Cazenove and Rothschild, while Investec acted for Steinhoff.