From the Securities Lending Trading Desk

new pill

We’ve seen increased demand for US based Chesapeake Energy Corp following their fourth quarter results. In Asia, we continue to witness long term securities lending demand for both Blackmores and its one of its rivals, Bellamy’s Australia, as investors remain concerned about their ability to reshape their businesses in the face of a rapidly changing operating environment. In Europe, negative trends continue for Swiss watchmakers as Swiss timepiece exports fall 6.2% YOY.

Below please find the February 28 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

Last week we saw an uptick in demand for oil and natural gas producer, Chesapeake Energy Corp. as they announced their fourth quarter results. The shale driller has struggled over the past few years as “a glut-driven collapse in energy prices erased the chance of those assets generating profits any time soon”, according to Bloomberg. Despite trimming losses and beating analyst earnings estimates, Chesapeake Energy Corp’s share price is trending lower. The price is down 21% from the start of the year, closing at $5.92 on 2/22/17, yet still well above last year’s low of $1.59 on 2/12/16. Chesapeake is in the middle of a huge transition to high-margin crude and an effort to restructure and reduce their debt. It was a top earner in 2015 only to fall off in 2016 amid short covering as stocks fell to all-time lows.

Despite fee levels easing recently, demand remains strong for Tesla Inc. as the share price trends lower. On 2/22, Tesla reported fourth quarter and full year results. In addition, CEO Elon Musk held a call with analysts where he delivered some concerning updates that may explain the recent share price decline. The main points of concern included the need for a cash infusion and the departure of CFO, Jason Wheeler. Though these are valid concerns, many analysts remain bullish on Tesla as the company has a decent amount of cash on their balance sheet to support the launch of the Model 3. With regard to the departure of their CFO, Deepak Ahuja, who was responsible for getting Tesla through near-bankruptcy in 2008 and an IPO in 2010, has already been named as the replacement. Tesla remains a long term focus name of borrowers.

Asia Pacific

South Korean bio-pharmaceutical manufacturer Celltrion Inc. announced that it won an approval from a European regulator for the sale of its bio-similar drug Truxima. Following the approval, Truxima can now be sold in 28 European Union countries, as well as Norway, Iceland and Lichtenstein. Celltrion Inc. has been highly sought after in the lending market for two years as investors questioned the long term viability of the company’s business model. Following several recent positive news announcements and a period of share price stability, lending demand for Celltrion Inc. is beginning to subside.

One of Australia’s largest niche exporters reported disappointing sales and profit figures as shifting consumer trends and challenges to trading in China dampen demand for its’ products. Last week, vitamins and supplements powerhouse Blackmores reported that profits for the six months to December 2016 fell to A$28.5 million ($22 million), while its sales revenue dropped 5.6 per cent to $322 million. The company cited that this was as a result of changing buying patterns of Chinese consumers and high stock levels held by Australian retailers. We continue to witness long term securities lending demand for both Blackmores and its one of its rivals, Bellamy’s Australia, as investors remain concerned about their ability to reshape their businesses in the face of a rapidly changing operating environment.

Europe

EDF’s EUR 4bn rights issue confirmed by board of directors. French energy company, EDF, will carry out its’ long anticipated rights offering this March to finance its’ controversial Hinckley Point project. The French state is backing EUR 3bn of the rights offering but only subscribing to 75% of their 85% stake. It is yet to be determined how the French government will trade the remaining 10%; if their rights are sold in the market, it may cause a medium-to-high arbitrage spread between ordinary shares and rights. While the market awaits EDF to announce deal terms, borrow appetite is healthy.

Negative trends continue for Swiss watchmakers as Swiss timepiece exports fall 6.2% YOY. Signs point to a slow pace of recovery for the watch sector as analysts further downgraded Swatch Group. Berenberg commented that smart watches are not a threat to market share, but the industry needs to improve digitalization and marketing to the younger demographic. Swatch and luxury watchmaker CIE Richemont shares on loan have increased last week.