From the Securities Lending Trading Desk

Electronic fingerprint scanner identification

We’ve seen a further increase in demand for Windstream Holdings Inc. after they agreed to buy EarthLink Holdings Corp. in a deal valued at $1.1 billion. Chinese Coal producers fell in Hong Kong trading as three key coal producers slashed prices. In Europe, demand for Swedish biometric scanner maker Fingerprint Cards is increasing and fee levels remain elevated for REC Silicon ASA as a result of trade restrictions staying in place under the Trump administration.

Below please find the November 15 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

U.S. prosecutors may bring charges of price collusion against generic pharmaceutical companies by year-end in a sweeping criminal investigation. This will be yet another new challenge for a sector that has already been receiving pressure from an outraged public over out-of-control prices of some medicines. The Department of Justice started the investigation two years ago and includes over a dozen companies including Mylan NV, Teva Pharmaceuticals, and Lannet Company. The grand jury probe is examining whether some executives agreed with one another to raise prices. The news sent each stock named in the investigation spiralling downward.

We saw additional demand for Windstream Holdings Inc. after they agreed to buy EarthLink Holdings Corp. in an all-stock deal valued at $1.1 billion, including debt. The deal will give the struggling internet service provider scale and the capacity to cut costs, as revenues for both companies remain under pressure. Windstream expects to issue 93 million shares of stock valued at about $673 million based on the carrier’s Nov. 4 closing price. Prior to the deal being announced, short interest had been building based on Windstream Holdings Inc.’s third-quarter earnings release, in which the company fell short of Wall Street’s expectations, reporting revenue at $1.34 billion; $10 million below estimates. The increase in demand, coupled with limited street-wide liquidity has sent fees-to-borrow trending higher.

Asia Pacific

Shares in one of Australia’s largest niche exporters continue to remain under pressure as tighter tax rules in China on imported goods negatively impact sales and reduce margins. Vitamin manufacturer Blackmores Ltd saw its first quarter profit slump by 47% to A$12 million ($9.2 million). The share price has slumped by almost 50% since the beginning of the year after the Chinese government subjected some premium export products to new e-commerce tax regulations. The changes, which were implemented in early April, have come under the auspices of a broader overhaul of the tax system aimed at making levies on products posted to shoppers from overseas more comparable with rates paid locally. We continue to witness strong long-term securities lending demand for Blackmores, which had recorded a record profit of A$100 million ($76 million) last year amid an unprecedented demand for high quality products by Chinese consumers.

Chinese Coal producers fell in Hong Kong trading after three key producers slashed prices. Yanzhou Coal Mining Co. cut the cost of thermal coal to 10 Yuan/ton saying the cut is aimed at preventing excessive coal price rises. The move followed previous cuts by China Shenhua Energy Co. Ltd and Yitai Coal Co. Ltd which placed downward pressure on prices across the industry. Chinese coal producers have recently been focussed on cutting costs and reducing debt amid weaker global demand for coal. We have seen strong long term lending demand for Yanzhou Coal Mining Co. and China Coal Energy Co. Ltd.

Europe

Cost to borrow Swedish biometric scanner maker Fingerprint Cards is trending higher. Demand is steadily increasing for shares of 2016’s top European special, Fingerprint Cards. Analysts have cut sales projections and the share price has tumbled to a 4 month low, while Sweden’s OMX 30 index performed well during the same period. Utilization is above 90% and fees are climbing into the mid-30’s.

Fee levels remain elevated for REC Silicon ASA as polysilicon trade restrictions are believed to likely stay in place under the Trump administration. Since 2012, the U.S. has imposed anti-dumping and subsidy tariffs on Chinese panel imports. In response to this, China imposed panel import tariffs which directly impacted companies such as REC Silicon and Hemlock Semiconductor. If these tariffs remain in place it is believed it will limit REC’s sales potential.