From the Securities Lending Trading Desk

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Directional demand has picked up for Sears Holdings (SHLD) as the share price pops. Demand for luxury goods in Europe and Asia is beginning to recover, prompting borrowers to seek shares of Prada Spa. Demand peaked last week for the Italian Bank Unicredit SPA as the rights trading period closed Friday.

Below please find this February 22 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 

Directional demand has picked up for Sears Holdings (SHLD) as the share price pops. SHLD fell to a 52-week low of $5.54, but since then has rallied roughly 35%. Recently SHLD announced online sales declined by approximately 6% in the first three quarters of 2016 and by over 9% in 2015. This comes as shoppers are increasingly purchasing online and other department stores are quoting double-digit increases in online sales. SHLD has been a long term focus of demand as they have focused on “transformation,” yet their struggles and obstacles remain the same and seem to be getting worse. Fee levels for new allocations of SHLD are up 25% from earlier this month as the recent share price spike creates a new entry point for shorts.

Last week there was increased interest in Fortress Investment Group LLC amid news they will be purchased by SoftBank Group Corp. This is expected to be an all cash deal valued at $3.3 billion and expected to take place in the last half of 2017. FIG’s share price rallied nearly 40% on the news and bullish options on FIG spiked. According to Bloomberg, “a March option with an exercise price of $6 changed hands 8,328 times, with its open interest quadrupling. Its value surged as much as 388 percent on Wednesday.” The movement in these options came before the merger news broke which has heightened concerns for some investors. So far firm demand has not materialized but more to come as this deal has a long way to go before closing.

Asia Pacific 

Shares in Toshiba Corp tumbled last week as the troubled electronics conglomerate’s problems continued to deepen. After delaying the announcement of its third quarter 2016 earnings, Toshiba confirmed that it would need to write off as much as $6.3 billion in a writedown of its nuclear business in the US. New allegations of accounting irregularities, management failure and friction with its auditors have also plagued the company as it faces a tough battle to convince its main creditors that it has a viable plan to remain in business. We have witnessed continued securities lending demand in Toshiba in recent weeks, as it also mulls over a potential sale of part of its semiconductor business to shore up its depleted balance sheet.

Prada Spa reported sales growth amid signs demand for luxury goods in Europe and Asia is beginning to recover following a year of declines. The Prada Spa results match those seen by other luxury goods manufacturers such as LVMH, Gucci-owner Kering SA and Burberry. Prada Spa cited Europe and Asia as its most dynamic areas with China experiencing a renewed period of rapid growth. The company also reported that declines in Hong Kong and Macau are moderating. We have seen strong long term lending demand for Hong Kong listed Prada Spa.

Europe 

Demand peaked last week for the Italian Bank Unicredit SPA as the rights trading period closed Friday. Volatile trading throughout the week provided opportunity for strong securities lending returns. The highly anticipated rights issue was completed this week and we will keep an eye on demand and the share price as the new shares pay out into the market.

Vonovia’s cash and stock offer for Conwert Immobilien Invest CWI AV remains open until mid-March. Demand for Conwert guaranteed tender elections present embedded option value and arbitrage spreads. The desk is closely monitoring the deal and will present alpha opportunities to clients as optionality prospects formulate.