From the Securities Lending Trading Desk

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Last week saw an uptick in demand for Frontier Communications Corporation (FTR) as the share price tumbled amid an analyst downgrade and speculation of a canceled dividend. Fee levels are climbing for Altisource Portfolio Solutions (ASPS). Shorts are getting squeezed and the price has spiked more than 60% since February 23. In Asia, we continue to see strong long term lending demand for Chinese automaker BYD Co Ltd, as it issued a profit warning due to slowing growth in the demand for electric vehicles. 

Below please find the April 4 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 saw an uptick in demand for Frontier Communications Corporation (FTR) as the share price tumbled amid an analyst downgrade and speculation of a canceled dividend. According to an analyst for Goldman, FTR may suspend their quarterly dividend after Q1 2017. Currently the 12 month yield on FTR is 20%, causing some bears to speculate that long-holders will look to sell their shares of FTR should this suspension occur. FTR provides residential and business communications services and has struggled to retain landline customers as more households cancel their services in favor of smartphones. Recently, FTR posted a 71% year-over-year increase to revenue that was largely due to the $10.5bn deal to acquire Verizon’s California, Texas, and Florida wireline operations. However, investors are extremely concerned with waning growth, both sequential and organic. Other stocks in the industry facing similar struggles include CenturyLink Inc. (CTL) and Windstream Holdings Inc. (WIN), but to date, these stocks are less sought-after.

Fee levels are climbing for Altisource Portfolio Solutions (ASPS). Shorts are getting squeezed and the price has spiked more than 60% since February 23. In February, ASPS announced disappointing Q4 results and lowered their 2017 guidance causing the share price to fall to a low of $21.96. Within the same month, ASPS, which provides services and technology to the mortgage and real estate industries, disclosed that the Consumer Financial Protection Bureau(CFPB) was investigating potential violations with regard to technology services provided to Ocwen Financial (OCN). ASPS’ share price has been on a tear as shorts look to cover their bearish positions and buy ASPS, driving the stock even higher.

Asia Pacific

Chinese automaker BYD Co Ltd issued a profit warning due to slowing growth in the demand for electric vehicles. Byd Co Ltd warned first quarter net profits may fall by up to 35% to 550 million yuan (HK$620 million) and attributed the slowdown to government electric vehicle subsidy cuts. Chairman Wang Chuanfu said the target growth rate of EVs this year will be around 40% which is a sharp decline from the 80% growth seen in 2016. We continue to see strong long term lending demand for BYD Co Ltd.

Hong Kong’s dominant free-to-air broadcaster announced poor annual results last week amid a lingering economic slowdown in the city and lower advertising revenue. Television Broadcasts Ltd, also known as TVB, said 2016 earnings amounted to HK$500 million ($64.4 million) compared to HK$1.33 billion in 2015. The broadcaster faces a number of headwinds including a dwindling viewer base, changing viewer habits, and the growth of online streaming content. We have witnessed a gradual increase in securities lending demand for TVB in recent weeks, which also announced a buyback offer of HK$4.21 billion ($540 million) back in February. The offer is currently subject to regulatory approval while a date for an extraordinary general meeting to confirm the offer has yet to be set by TVB.

Europe

Activist short seller Gotham City Research triggered a sell-off in German private equity firm Aurelius. Gotham City opined that Aurelius shares are “worth no more than EUR 8.56 per share, implying at least -88% downside to its current price.” Gotham’s report calculated NAV 80-90% lower than Aurelius’ unaudited DCF-NAV, asserted Aurelius understated liabilities, and misrepresented negative goodwill. Interestingly, Gotham covered their short position no lower than EUR 35-40, well above its EUR 8.56 fair value call. Shares whipsawed the three sessions following the press release as all four analyst recommendations were declared buys. Gotham’s public research reports have sent stock tumbling in the past, most notably Spanish Wi-Fi provider Let’s Gowex, which is now insolvent, and insurance outsourcer Quindell PLC, which has since been re-branded.

Rights issues are on the docket for April. Lonza plans to raise 2.3 billion francs in a rights offering to help finance its purchase of Capsugel; shareholder approval is sought at the April 25th AGM. Cobham’s GBP 512mm rights offer will run 4/19 – 5/4 as the company aims to support operations by cutting debt and strengthening balance sheet. Life Healthcare Group’s recent UK acquisition of Allied Medical Group has proven challenging; LHC’s 9 billion rand rights offer opens April 3rd as the company looks to reduce debt and restore its investment-grade rating by attaining the “appropriate level of gearing.” Tullow Oil’s GBP 607mm rights issue kicks off April 6th as the company seeks to trim debt and invest in drilling opportunities. Arbitrage spreads between rights and ordinary shares will hinge on a number of variables that are closely monitored by the desk.