From the Securities Lending Trading Desk

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We’ve seen strong demand for shares of Isle of Capri Casinos Inc., that were electing to take no action. In Europe, Bernard Arnault is consolidating his luxury brand empire, uniting ownership of Christian Dior under the LVMH umbrella. Shares in troubled airbag manufacturer Takata Corp fell sharply in Japanese trading.

Below please find this May 2 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, there was strong demand for shares of Isle of Capri Casinos Inc., that were electing to take no action. Eldorado Resorts’ buyout of Isle of Capri has cleared all regulatory hurdles and will close on 5/1/17, according to an SEC filing. The buyout was for $23 per share in cash or 1.638 shares of Eldorado stock for each share of Isle of Capri stock, with the restriction that 58% of the buyout be paid in cash and the rest comprise stock. Capri Casinos was a lucrative Sec Lending trade as the terms heavily favored stock elections. Through most of the deal, the stock option was roughly valued at $7.00+ premium to cash and roughly $9+ premium to TNA (cash and stock mix). For those clients that elected to take no action we negotiated their holdings on a per share basis.

Strong demand followed an announcement by CIT Group Inc. of a cash tender to purchase its common stock. Dutch Auctions can result in lending opportunity. For corporate repurchases, a range of prices is set by a company within which shareholders are invited to tender their shares. The tender offer is open for a specific period of time, and the amount of stock to be purchased is stated as well (subject to proration). When there is a difference between the tender price and the market price, there is lending opportunity. For CIT, the company is offering to purchase its common stock for cash for an aggregate purchase price up to $2,750,000,000, at a single per share purchase price not greater than $48.00 and not less than $43.00 net to the seller in cash. The company will buy back at least 28.26% of its issued and outstanding shares with the percentage going as high as 31.55%. CIT closed at $45.99, in the middle of the range, on 4/27.

Asia Pacific

One of South Korea’s largest conglomerates is planning to restructure some of its key businesses in an effort to slash cross shareholdings and extend its Chairman’s grip of the combined entity. Lotte Group said it plans to divide four key businesses (Lotte Confectionary, Lotte Chilsung Beverage, Lotte Food, and Lotte Shopping) into operating and holding units and then merge three of the holding units into Lotte Confectionary’s holding entity. The proposal is subject to shareholder approval and is by no means a certainty as Lotte has faced criticism from the government in the past for its complex shareholding structure that has allowed family members to exert excessive control relative to the number of shares they owned. We witnessed increased securities lending demand for the individual companies following the announcement of the proposal.

Shares in troubled airbag manufacturer Takata Corp fell sharply in Japanese trading following media reports that a restructuring plan had been agreed. Takata denied the reports and said that while it remains in talks with parties, including KSS and automakers, no agreement has yet been reached. Shares were briefly suspended in Tokyo trading after falling by the daily limit following the media reports. Historically, we have seen strong long term lending interest for Takata Corp due to an ongoing Airbag defect scandal.

Europe

Last week saw two Swiss firms add to the long list of rights issues we’ve seen in 2017. Lonza Group, the Swiss pharmaceutical supplier is looking to raise 2.3 billion swiss francs in order to finance the purchase of US capsule maker Capsugel. The final terms of the rights issue were announced with a 2 per 7 ratio at a subscription price of CHF 136. The trading period looks set to run from the 2nd to 8th May. Lender Credit Suisse will also look to raise $4 billion in an effort to restructure and help address outstanding capital concerns. The issue is part of wider plan by CEO Tidjane Thiam to move the business away from riskier capital intensive banking, focusing on its wealth management business instead. Details of the rights issue were announced at a subscription price of CHF 10.8 in a ratio of 2 per 11 with the trading period set as the 23rd May to 2nd June. As with all rights issues the desk will be monitoring the spread over the trading period for any potential uplift for clients.

French billionaire Bernard Arnault moves to consolidate his luxury brand empire, uniting ownership of Christian Dior under the LVMH umbrella. Christian Dior shareholders may tender and choose a payment combination in cash or Hermes shares, subject to proration. The mix-match offer provides election optionality arbitrage on Dior shares, meaning Dior borrow costs will be priced based upon client elections. Hermes borrow is needed to hedge the stock portion of the deal. If a high percentage of the Christian Dior free float executes on the arbitrage spread, there may not be sufficient Hermes shares in the lending market to satisfy hedging needs. The Hermes spot price could rally and put a maximum stock option in the money, subsequently driving borrow fees, as more Hermes shares would be needed to hedge the deal. The market is assessing a high probability that the deal will gain approval, as some arbitrageurs have already set up the trade. Formal offer documentation is due in the coming days.