From the Securities Lending Trading Desk

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As Sears Holdings’ struggles continue, we are seeing increased bearish sentiment for companies with exposure to the retailer, specifically REIT, Seritage Growth Properties.  Borrowers are seeking shares of Toshiba Corp after plans to sell its memory-chip business took an unexpected turn last week.  In Europe, capital raising deals are driving securities lending demand.

Below please find June 20’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 Sears Holdings’ (SHLD) struggles continue, we are seeing increased bearish sentiment for companies with exposure to the retailer, specifically REIT, Seritage Growth Properties (SRG). According to Bloomberg, “Sears’ declining financial stability is pushing Seritage to sign third-party tenants at lower rates in a scramble to shift its portfolio exposure.” There is speculation that tenants could look to exploit SRG’s vulnerability in the event of a Sears bankruptcy. The REIT still expects to receive rent payments in the event of a SHLD chapter 11 filing.  Also helping their stock’s valuation is the fact that there is still intrinsic value in the property itself. Other companies with exposure in their portfolios to SHLD include Simon Property Group and GGP Inc. Exposure here, however, is to a lesser degree and as such there is less bearish sentiment on these names.

Directional demand for gun stocks has picked up as mass shootings renew concerns regarding the future of the firearm industry as momentum builds for tighter restrictions on some of the companies’ best-selling products. This week’s incident at a congressional baseball practice field was no exception. We are seeing continued demand for companies such as Sturm Ruger & Company Inc. (RGR) and American Outdoor Brands Corporation (AOBC), formerly Smith & Wesson Holding Corp (SWHC). Both companies saw their stock prices close at six-month highs on 6/14. This sector has been in and out of focus for years as these companies remain sensitive to political changes and gun violence reports.

Asia Pacific

One of Australia’s leading television broadcasters applied for voluntary administration last week after two key local media magnates declined to extend financial support. Ten Network informed investors that News Corp’s co-chairman Lachlan Murdoch and regional TV owner Bruce Gordon said that they would not extend a borrowing facility that the company was relying on since April, raising fears that the broadcaster faced imminent collapse. The Australian broadcasting industry has struggled of late as a result of racking up large debts and as advertisers follow viewers who have turned to streaming services such as Amazon Prime and Netflix. We have witnessed strong securities lending demand for Ten Network in recent months, which has seen its share value decline by over 80% this year.

Toshiba Corp’s plans to sell its memory-chip business took an unexpected turn last week after one of its partners in a manufacturing joint venture sought an injunction to block the transaction. US-based Western Digital Corp and Toshiba have sparred in recent weeks on what legal rights each company has in the joint venture as the Japanese conglomerate desperately seeks to raise cash to pay off debts following a multibillion-dollar write-down of its nuclear power equipment business. To compound Toshiba’s woes, local media also reported last week that the Tokyo Stock Exchange intends to demote the company to the exchange’s Second Section in early August, thereby forcing some institutional and retail investors to sell their holdings in the company. We have witnessed an increase in securities lending demand for Toshiba in the past week.

Europe

Capital raising deals are driving securities lending demand in Europe. Getinge is planning a new share issue of approximately SEK 4bn to strengthen the Group’s balance sheet by reducing debt and thereby creating greater scope for action. An Extraordinary General Meeting is scheduled to take place in August 2017. Elsewhere, Astali launched an offering of senior unsecured equity linked notes due 2024, for minimum amount of EU100mn, which may be increased by up to EU40mn. Both names had strong broker demand.

Elis (ELIS FP) and Berendsen (BRSN LN) announced an agreement in principal on key terms of a possible recommended offer. The possible offer consists of 0.403 new Elis shares and GBP 5.40 in cash for each Berendsen share. The deal has yet to be approved, but at time of this print there is approximately 2.3% spread in the trade. If a mix-match facility is offered for Berendsen shareholders, we can expect arbitrage opportunities on certain election types, meaning both sides of the deal may trade special at elevated borrow levels.