From the Securities Lending Trading Desk

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We’ve seen an increase in demand for both Smith & Wesson Holding Corp and Sturm Ruger & Company Inc. as a result of the firearm sector taking a hit following the election. Australia’s largest niche exporters’ profit margins are being negatively impacted by the change in consumer tastes and tighter tax regulations on imported goods in mainland China. In Europe, convertible bonds have been in focus with two European names recently announcing an issue.

Below please find the December 13 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

With the firearm sector taking a hit following the election and again in early December, there has been an increase in demand for both Smith & Wesson Holding Corp and Sturm Ruger & Company Inc. Both fell roughly 25% the week of the election. Historically, the election of presidents who are thought to support gun control sparks fear of greater regulation causing gun buyers to buy more and firearm company stock prices to soar. However, the election of Donald Trump has had the opposite effect as buyers are less likely to “load up”, causing stock prices to decline. This sector has been in and out of focus for years as these companies remain sensitive to political changes and gun violence reports such as Sandy Hook and the Orlando Nightclub shootings.

Nutanix, Inc. has been a strong focus as the share price declines and utilization climbs. At the end of November, there was a post-earnings sell-off after the cloud infrastructure company reported that revenue in the first quarter jumped 90% to $166.8 million, with billings growing 87% to $239.8 million. According to reports, the company ended the quarter with nearly 4,500 end customers, adding over 700 end customers during the quarter. Despite the positive results, some bearish investors remain concerned with competition from larger infrastructure companies such as Ciso and HP.

Asia Pacific

Changing consumer tastes and tighter tax regulations on imported goods in mainland China continues to negatively impact profit margins of some of Australia’s largest niche exporters. Organic baby food maker Bellamy’s Australia Ltd saw its shares tumble by as much as 44 percent in a single trading day earlier this month. This followed its revised revenue outlook for 2017 on the back of weaker than expected sales on Singles’ Day, China’s major retail bonanza sales event. Bellamy’s, along with peers such as A2 Milk, Bega Cheese and Blackmores have been under increased pressure since April this year after the Chinese government subjected some premium export products to new e-commerce tax regulations, resulting in reduced demand from Chinese consumers. We continue to witness strong securities lending demand for both Bellamy’s and Blackmores, whose shares have both declined by more than 50% this year.

A surprise announcement by the Australian government on how it will cut funding to the aged care sector has provided a welcome boost to several listed operators. The Assistant Minister for Health and Aged Care Ken Wyatt told a news conference last week that changes to the Aged Care Funding Instrument (ACFI) that were announced in the 2016 budget were to be replaced with new cost-saving measures. Investors reacted positively with shares in providers such as Estia Health, Japara Healthcare and Regis Healthcare all rising sharply in response to the news. However, some analysts have cautioned that the share price rally may prove to be an overreaction as funding cuts to the sector are still expected in the long run, which will negatively impact earnings for these operators. We have seen strong long-term securities lending demand for Estia Health, Japara Healthcare and Regis Healthcare.

Europe

Convertible Bonds have been in focus with two European names recently announcing an issue. The Belgium fruit and vegetable producer Greenyard confirmed the offering through its subsidiary Fieldlink for an initial EUR 110 million, with the potential for a further increase option of up to EUR 15 million. The notes are due on December 2021 and can be exchanged for Greenyard stock at a 25% premium to VWAP over the trading period. The offer was part of a wider re-financing deal that aims to save the company more than EUR 15 million in funding costs. Finally, Unicredito is selling EUR 500 million equity-linked certs, which will be mandatorily settled in ordinary shares of Bank Pekao S.A. on or before 15 December 2019. Unicredit Spa issued a statement that it would be selling 32.8% of its Bank Pekao unit to a Polish Development Fund and the insurer PZU SA, for USD 2.6 billion in order to help the Italian lender increase capital.

European rights issues see demand and lending fees spike. A German carbon component producer has seen increasing levels over the trading period of its rights issue. The rights issue which was announced back in September was issued in order to reduce debt and provide investment for growth as the firm set about dealing with the over capacity in the steel industry, which has reduced the price for graphite electrodes. In Switzerland, the systems and productions provider Meyer Burger Technology has also seen levels spike with the rights trading this week. The proceeds from the issue were to strengthen their capital base, and complete the redemption of their 2017 bond issue.