From the Securities Lending Trading Desk

Macau Casino

In the US, demand remains high for Coty Inc. and Procter & Gamble Co., as their businesses are set to merge. In Asia, bearish sentiment begins to increase again for Macau casinos despite a strong rally in their share price this year, whilst South Korea’s container shipping industry plunged into a deeper crisis after its largest operator filed for court receivership. The European market is seeing strong demand for companies with convertible bond sales.

Below please find the September 6 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 secondary offering results in increased liquidity and lower fee levels for Jones Energy Inc. Jones Energy is an independent oil and gas company engaged in the development, production and acquisition of oil and natural gas properties in the Anadarko and Arkoma basins of Texas and Oklahoma. The company announced they were increasing their Class A common shares offer from 14 million to 21 million, priced at $2.77 per share. According to CapitalOne, this represented a 40% dilution in the share count, including the 3.15mm greenshoe. As a result, the share price trended down and closer to the $2.77 offer price. Overall, the share price has fallen as much as 39% over the past two months. Once the shares paid out, brokers quickly returned and refinanced more expensive loans.

Demand remains high for Coty Inc. and Procter & Gamble Co., as their businesses combine and spin-off of Galleria. Procter & Gamble Co. will merge 43 of its beauty brands with Coty Inc. in a Reverse Morris Trust transaction via a potential spin-off. In addition, Procter & Gamble’s shareholders can voluntarily exchange shares for Galleria Co. At this time the exchange ratio and expiration date and time have not been released. This week we are seeing strong demand for both Coty Inc. and Procter & Gamble

Asia Pacific
Bearish sentiment begins to increase again for Macau casinos despite a strong rally in their share price this year. Blue-chip casino operators such as MGM China, Sands China and Wynn Macau had all witnessed strong gains in the Hong Kong stock market up until August. This can be attributed to an increase in visitors from mainland China, which resulted in improved gaming revenue growth and better operating margins. However, in recent months the opening of new casinos and potential tightening up of government regulations has led to several downgrades from analysts covering the sector. We have witnessed an increase in securities lending demand for Wynn Macau on concerns the recent opening of its Wynn Palace resort may cannibalize earnings away from its existing casino operation in the city.

South Korea’s container shipping industry plunged into a deeper crisis after its largest operator filed for court receivership last week. Hanjin Shipping Co, which in recent years has been saddled with substantial debts running as high as 152 years’ of earnings, became the latest victim of a prolonged slump in global trade since the Great Financial Crisis in 2008 and the slowest pace of economic growth in China in a quarter of a century. Hanjin’s fate was sealed after its creditors, including state-run Korea Development Bank, withdrew their financial support after rejecting the company’s proposed restructuring plan. The global container shipping industry has been forced to sell assets, cut jobs and merge companies to combat high levels of over capacity. We have seen strong long-term securities lending demand for Hanjin Shipping, which may now pass on some of its assets, network and staff to its rival firm Hyundai Merchant Marine.

Europe
ADLER Real Estate AG has been a long term focus of demand. According to reports, the German residential property sector is expected to continue to grow. HSBC was quoted as saying the sector is a “bright spot for investors looking for exposure to fast-expanding profits”. Adler’s share price has been trending higher, and just shy of the 12/29/16 52-week high. The company has been busy with acquisitions to grow their real estate portfolio.

The European market has seen strong demand for companies with convertible bond sales. Inmarsat PLC, Remy Cointreau SA, and PPC Limited are just a few names with upcoming convertible bond sales which are triggering borrower demand. The benefit to investors buying convertible corporate bonds is that they will have the ability to convert them into common stock; should the stock price rise and the price of the common stock falls, the bond has a floor. The downside of these offers is typically the dilution effect on the stock in the short term.