From the Securities Lending Trading Desk

Golden piles going to oil refinery

We’ve seen a rise in bearish sentiment for oil and gas pipe provider, Franks International N.V., ahead of their third quarter 2016 earnings release. There has been a gradual increase in securities lending demand for Hong Kong based international carrier Cathay Pacific in recent weeks, following news they will scrap their profit outlook for the remainder of the year. In Europe, demand for Telecom Italia has increased ahead of next month’s convertible bond maturity.

Below please find the October 18 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 

Bearish bets rose on oil and gas pipe provider, Franks International N.V., ahead of their third quarter 2016 earnings release, scheduled for early November. The company’s last earnings report came in July, in which they posted a much wider-than-expected loss due to deteriorating market conditions, particularly in regard to demand for its offshore services. The company also cut its quarterly dividend by 50 percent. Shares hit a 52-week low on 8/28 and have recovered very little since. With limited securities lending market liquidity, utilization currently stands at 94% and borrowing fees have spiked.

Fee levels for high-speed fiber optic communications provider Acacia Communications Inc. fell rapidly, after its 4.5 million share equity offering settled into the market. Brokers were promptly driven to re-finance their more expensive borrows. Prior to the influx of market shares, fee levels were rising steadily due to increased short demand and a lack of lendable shares. There will likely be another round of re-financing as supply is expected to get a significant lift from November’s lockup expiration. However, there remains a chance that the increased float after lockup date could trigger additional short activity

Asia Pacific 

A deteriorating business environment has prompted Asia’s biggest international carrier to conduct a significant review of its entire business. Hong Kong based Cathay Pacific announced last week that it will scrap its profit outlook for the remainder of the year as it expects its second half results to be worse than the first half, which in itself had declined by 82%. The airline has been struggling to counter the rise of Middle Eastern and mainland Chinese rivals who have captured a significant portion of Cathay’s business that had catered for passengers using Hong Kong as a hub for their travels from Asia to Europe and the US. We have witnessed a gradual increase in securities lending demand for Cathay Pacific in recent weeks, whose shares are trading at its lowest in seven years and are the third-worst performer in the Hang Seng Index this year.

A South Korean court began the process of selling assets belonging to Hanjin Shipping Co. less than two months after the company sought bankruptcy protection. The planned sale would involve employees and customers of Hanjin’s units which handle Asia-U.S. cargo as well as some vessels. Hanjin Shipping Co. was once the world’s seventh biggest container carrier and news of its bankruptcy severely disrupted global supply chains ahead of the year-end holiday season. We have seen strong long-term lending demand for Hanjin Shipping Co.

Europe 

Demand for Telecom Italia shares is climbing ahead of next month’s convertible bond maturity. Telecom Italia’s EUR 1.3b mandatory convertible bond matures November 15th. The conversion price is set over a 20 day averaging period which began on 10/13. Telecom Italia shares have traded with a high short base over the past year, in a range of 800mm-2.1b shares on loan, according to DataLend. This has caused levels to spike from GC to ~100 bps as convertible bond holders’ hedge their positions.

Capital raising remains a focus in the Italian Banking Sector. Long anticipated additional information came out this week with regard to UniCredit SpA’s plans for capital raising. In an effort to build up capital and meet stringent regulatory requirements, Chief Executive Officer Jean Pierre Mustier is looking to raise as much as 13 billion euros ($14 billion) via share sale. This is no small feat as the company’s complex structure is spread across 17 countries. Brokers are actively locating stock as they await further details which are expected to be announced in December.