From the Securities Lending Trading Desk

Wall street

We are expecting the IPO climate in the US to improve in 2017 due to recovering economic fundamentals, higher valuations and lower volatility. This week, we focus on names to watch.  In other news, Bellamy’s is bringing in a proxy firm to help canvass shareholders ahead of a key vote that will decide the fate of four independent directors and the long anticipated details of Unicredit Spa’s $14 billion rights offer were announced.

Below please find February 7 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 

Merger news has sparked demand for Entercom Communications Corporation (ETM) and CBS Corporation (CBS). We are seeing tremendous interest for ETM on news the company and CBS’s CBS Radio unit have agreed to merge in a “reverse Morris trust.” The transaction is expected to be tax-free to CBS shareholders. In the reverse Morris Trust, CBS shareholders will have the option of receiving shares in CBS Radio, which they would then trade for shares in the merged company. After the merger is completed, CBS Radio shareholders would receive approximately 105 million Entercom shares — valued at $1.49 billion at the market price before the deal’s announcement, or $1.68 billion Thursday morning — or 72% of all outstanding shares of the combined company on a fully diluted basis. The deal is not expected to close until the second half of the year, making it likely that we will see long-term demand for shares of both companies.

Despite a lackluster year for initial public offerings in 2016 amid political uncertainty and market volatility, investors expect the IPO climate to improve in 2017, thanks to improving economic fundamentals, higher valuations and lower volatility. Last week we saw demand for Jagged Peak Energy Inc. (JAG), REV Group, Inc. (REVG), and Jounce Therapeutics, Inc. (JNCE). These companies represent a variety of sectors, including oil and gas, specialty pharma, and automotive. Typically we see strong broker demand for IPO’s as lead managers look to the securities lending market to help facilitate liquidity. The initial public offerings can also increase bearish sentiment as the market weighs expectations against uncertainty on whether the deals will close. Other highly anticipated IPO’s for 2017 include Spotify, Pinterest, Airbnb, Snap Inc. (Snapchat), and Trivago.

Asia Pacific 

The battle for control at beleaguered infant formula maker Bellamy’s Australia is heating up, with the company bringing in a proxy firm to help canvass shareholders ahead of a key vote that will decide the fate of four independent directors. Bellamy’s is working with proxy solicitation firm GPS, seeking feedback from its investor base, which has significantly changed in recent weeks ahead of an extraordinary general meeting set for the end of February. The company has been under significant pressure as it grapples with high inventory levels, a balance sheet under strain and declining sales in its key Chinese export market amid changing regulations for baby formula. We have witnessed strong long term securities lending demand for Bellamy’s, which has seen more than $1.1 billion wiped off its market capitalization from its peak in December 2015.

Macau casino revenues grew for the sixth straight month in January, however those revenues missed analysts’ estimates. Gross gaming revenue rose 3.1% but missed the median estimate of an 8.5% increase following an 8% rise in December. We have seen long term lending interest for Macau Casino names amid a Chinese government crackdown on corruption and excessive spending by government officials. We continue to see lending demand for Macau Legend Development and Wynn Macau Casinos.

Europe 

Last week the long anticipated details of Unicredit Spa’s $14 billion rights offer were announced. The Italian bank will sell new shares at 8.09 euros per share, offering 13 new shares for every 5 held. The subscription price announced provides a 38% discount to the theoretical ex-rights price when the rights start trading. Clients will benefit from this spread by holding their positions through the trading period, which runs from February 6 – 17.

Seadrill announced this week that negotiations to restructure their debt are more complex than anticipated. The company is seeking to raise a minimum of $1billion in capital. Ownership is taking a personal stake in the process by diluting their shareholdings. On the back of this news, demand has increased, with utilization reaching 96.8%. As negotiations carry on, we will continue to monitor the landscape on this name.