From the Securities Lending Trading Desk

new cars

The Chinese government plans to halt issuing permits to produce electric vehicles because of concern that additional approvals may impact the world’s biggest auto market. As the S&P Dow Jones Indices made changes to the S&P MidCap 400 and S&P SmallCap 600 indices, we have seen increased demand on several names as funds adjustment their positions.  In Europe, securities Lending Interest in UBI Banca increases amid speculation of a rights issuance.

Below please find June 14’s 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 

As the worst appears to be behind the Oil and Gas sector, Bears question if companies such as Chesapeake Energy Corporation can maintain valuations and meet the changing expectations of investors in the new, more stabilized market. Chesapeake Energy Corporation had been a strong focus of directional demand throughout 2015-2016 as the producer of oil and natural gas struggled through one of the worst commodity environments in memory. Despite the company’s ability to navigate liquidity challenges, investors have more recently been looking for profits amid expectations of strength. OPEC cut production and maintained the cut beyond the nine months previously expected given President Trump’s support of the industry; yet profits appear out of reach. In addition, reports show that in the most recent reporting period, the number of Chesapeake shares sold short surged by 15% to roughly 162 million, or 18.45% of the stock’s total float.

As the S&P Dow Jones Indices made changes to the S&P MidCap 400 and S&P SmallCap 600 indices, we have seen increased demand on several names. According to the release, TEGNA Inc. and Cars.com will replace J.C. Penney Company Inc. and Time Inc. respectively in the S&P MidCap 400. Also, J.C. Penney and Time Inc. will replace Tuesday Morning Corp. (and Hornbeck Offshore Services Inc. respectively in the S&P SmallCap 600. As a result we have seen increased broker demand for Cars, J.C. Penney and Hornbeck Offshore Services as funds make adjustments to their positions.

Asia Pacific 

The influx of short sellers into the Hong Kong market continued as two more companies were revealed to be in their sights. Carson Block of Muddy Waters LLC revealed that he was taking short positions in Man Wah Holdings Ltd leading to a 10% decline in Man Wah Holdings Ltd’s share price. In a similar move, Dan David of GeoInvesting LLC revealed that his firm has a short position in Dali Foods Group Co. In recent weeks there has been an increase in short sellers targeting Hong Kong listed securities as US based funds speculate companies listed in the city are committing fraud or manipulating their share price. In response, Martin Wheatley, the former head of Hong Kong’s securities regulator, said the city had one of the most robust short-selling systems in the world and that bearish bets can add discipline to markets. We saw strong securities lending demand for Dali Foods Group Co and Man Wah Holdings Ltd on the back of this news.

According to recent media reports, the Chinese government plans to halt issuing permits to produce electric vehicles because of concern that additional approvals may lead to a glut in the world’s biggest auto market. A suspension of new permits may delay plans by incumbents, such as Internet entrepreneur William Li’s NIO and Jia Yueting-backed LeEco’s electric-car unit that have said they intend to enter the market. The new-energy vehicle sector has emerged as a strategic industry in China as the government strives to boost sales in hybrids and fully electric cars by 10-fold in the next decade. We continue to see long-term securities lending demand for BYD Co, one of the nation’s largest electric car manufacturers, which has been struggling of late, due to cuts in government subsidies.

Europe 

Securities Lending Interest in UBI Banca increases amid speculation of a rights issuance. With approval secured on April 7th from shareholders, it appears that UBI Banca is set to announce a capital raising event in the near term, likely set for month end. Interest to borrow has picked up steam, and we look to capitalize on that as details on the issuance becomes clear.

Santander to the rescue as investors take hit on Banco Popular. Last week saw the struggling Spanish lender Banco Popular submitting to a takeover by Spain’s largest lender Santander. The decision follows the EU’s recovery and resolution rules after the ECB determined that the bank was failing or likely to fail an initiative that was put in place to stop taxpayers covering the bill for failing financial institutions. Santander will raise 7 billion euros in order to finance the takeover that saw investors holding Popular shares and its riskiest debt reduced to zero, senior bond holders have been protected. The wider message to markets and investors however is that unlike before, the ECB seems willing to let banks fail if they find themselves in similar circumstances.