From the Securities Lending Trading Desk

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Shares in Chinese selfie app producer Meitu Inc fell sharply in trading last week amidst confusion from MSCI, the leading index provider, on whether the company will be included in one of its indices next month.  After trading special for the past six months, fee levels have eased for Valvoline Inc. (VVV). Also in the US, concerns regarding slowing sales and possible cuts to federal funding are driving directional demand for solar energy companies.

Below please find the May 23 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 

After trading special for the past six months, fee levels have eased for Valvoline Inc. (VVV). “Ashland Global Holdings Inc. (ASH) completed the previously announced distribution of 170mn shares of common stock of Valvoline as a pro rata dividend on shares of Ashland common stock outstanding at the close of business on the record date of May 5, 2017,” according to Bloomberg. Valvoline joined the S&P MidCap 400 Index effective May 16. Despite the sharp decline in fee levels, there is still some bearish sentiment amid investor concerns that VVV may face soft share valuation for the next month as is typical for many companies after a spin-off.

Concerns regarding slowing sales and possible cuts to federal funding are driving directional demand for solar energy companies. According to a Bloomberg study, “short interest for US solar energy peers rose over the course of the trailing 12 months as concerns about demand this year has increased.” Companies such as First Solar and SunPower are focusing on module-only sales, as weakness in power purchase agreement pricing has dampened demand for US utility-scale solar projects. Meanwhile, another report showed that clean-energy companies saw a 30% decline in venture capital funding from 2011 to 2016. This is of particular concern as the industry faces headwinds while the Trump administration has continued to focus on increasing fossil fuel use and cutting federal subsidy programs.

Asia Pacific 

Asia’s largest international airline is in focus once again on speculation that it is due to announce major job cuts. Local media reported last week that Hong Kong-based Cathay Pacific Airways is looking to trim down its workforce considerably, as it strives to turn around its fortunes after reporting a full-year net loss last year. Cathay Pacific has been beset by lower passenger yields in the face of strong competition from mainland Chinese and Middle Eastern carriers. It is also reeling from a heavy write down due to a wrong-way bet on fuel hedging last year. We have witnessed strong securities lending demand in recent weeks, after leading index provider MSCI announced it would remove the airline from its Hong Kong index at the end of May.

Shares in Chinese selfie app producer Meitu Inc fell sharply in trading last week amidst confusion from MSCI, the leading index provider, on whether the company will be included in one of its indices next month. MSCI announced early last week that Meitu Inc would be included in the MSCI China Index, only to reverse its decision a day later. The move surprised many market observers, given the meticulous screening that companies undergo before being considered for index inclusion. MSCI cited that after further analysis, they came to the conclusion that Meitu did not meet the index’s minimum free-float requirements, after taking into account cornerstone investors’ 180 day lock-up periods. We have witnessed long-term securities lending demand for Meitu, which despite having not made any profits to date, has over 450 million active monthly users.

Europe 

There was an increase in European M&A activity last week.  The Italian infrastructure company Atlantia Spa announced plans to purchase its Spanish competitor Abertis Infraestructures in a deal worth $17.9 billion by offering 16.5 euros per share, a premium of 0.3% compared to the stock’s closing price on May 12. The move would see Atlantia manage more than 14,000 kilometers of highways increasing its annual revenue to 10 billion euros and overtake French rival Vinci SA. United Internet AG offered to buy German wireless operator Drillisch AG by increasing its stake to about 72% in a multi-step deal. The revised firm will hold 12 million customer contacts with annual sales over 3.2 billion euros. The deal would make it the fourth largest wireless operator in Germany in a deal that focuses on allowing United to compete with bigger rivals Deutsche Telekom and Vodafone.

Short interest dropped for Swiss watchmakers as exports signal an industry recovery. Industry utilization for Swatch shares dropped from 85% to 48% over 6 months, while Richemont dropped from 33% to 5% over the same period. Despite the drop in short interest, all-in rates for Swatch shares remain squeezed as there is insufficient lendable supply to cover short positions over dividend record date.