From the Securities Lending Trading Desk

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We’ve seen an increase in demand for US-based Flowers Foods Inc., as short sellers increased their positions in anticipation of disappointing third-quarter earnings results. Australia’s two largest bookmakers, Tabcorp Holdings and Tatts Group have decided to merge in an attempt to ward off increased competition. Whilst in Europe, broker demand was sparked by convertible bond issuances, and the European IPO market remains cold.

Below please find the October 25 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 

It was a disappointing IPO debut for oilfield service provider, Mammoth Energy Services as their shares fell 11% on the first day of trading, resulting in directional demand. Mammoth’s disappointing debut was likely due to high customer concentration, as well as oversupply in the industry. The company saw revenue decline over 50% in the first half of the year as top customer Gulfport cut back on production. Over the last several years, oilfield companies have been pummelled by low energy prices as OPEC members continued the excessive production of crude oil.

There was an uptick in demand for Flowers Foods Inc. (FLO), the producer of packaged bakery foods, as short sellers increased their positions in anticipation of disappointing third-quarter earnings results. In August, the company posted weaker-than-expected revenue for 2016 and cut its full year guidance, due to the increased competition and diminishing margins which have challenged many of the food companies in the industry. As bearish bets rose, fee levels trended higher.

Asia Pacific 

An influx of foreign rivals into the Australian betting market has prompted the nation’s two largest bookmakers to plan to merge in an effort to ward off increased competition. Tabcorp Holdings announced last week that it agreed to buy Tatts Group Ltd in a deal worth A$6.4 billion ($4.9 billion). Overseas rivals such as Bet365, Ladbrokes Plc and William Hill Plc have made significant inroads into the domestic market by providing round the clock betting accessible to Australians through their online platforms. Although the deal is expected to face scrutiny by Australia’s competition regulator, many analysts believe if the deal is approved it will result in increased synergies and provide the combined group much needed funds to bolster their online gaming presence. We witnessed an increase in securities lending demand for both Tabcorp and Tatts following the announcement of the deal.

Macau casino operators fell in Hong Kong trading following the detention by Chinese authorities of 18 Australian employees of gambling company Crown Resorts Ltd. The marketing of gambling services is illegal in mainland China despite mainland Chinese VIP visitors making up the large majority of Macau high rollers. Chinese authorities detained 18 Crown employees, including the head of high-roller operations, but declined to comment on whether they have been charged with offences. We saw lending interest in Wynn Macau Ltd and Sands China Ltd.

Europe 

Convertible bond issuances resulted in broker demand this week. Rallye SA announced the successful placement of a EUR 200 million offering of non-dilutive cash-settled bonds due 2022, exchangeable for existing ordinary shares of Casino, Guichard-Perrachon S.A. There was enough liquidity in the market that fee levels remained subdued. Fugro N.V. also announced the pricing of its offering of EUR 190 million subordinated unsecured convertible bonds due 2021. There was stronger demand and fee levels ticked up for FUR NA as it is believed the convertible offer will dilute up to 11% of shares.

The European IPO market remains cold amid weak demand in volatile markets. This week there was demand for U.K. waste-management business Biffa Plc, who cut their IPO price and went public despite investor uncertainty. Other companies such as Pure Gym and autoparts maker TI Fluid Systems deemed the market conditions as unfavourable and cancelled their listings. According to Bloomberg, “European companies have raised $28.2 billion from IPOs this year. That’s down from $48.4 billion this time last year. Performance is also down with newly listed shares rising about 11 percent on average this year compared with 24 percent a year ago, according to the data”.