From the Securities Lending Trading Desk

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Bullish sentiment for U.S. assets leads to increased IPO activity. In Asia, one of Japan’s largest car airbag manufacturers filed for bankruptcy on Monday. China’s domestic equities will join MSCI’s benchmark indexes, marking a landmark step in the continued integration of the nation with the global financial system. The Finnish construction company, Yit Oyj has sought to acquire Lemminkainen Oyj as it bids to increase its footprint in northern Europe.

Below please find June 27’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 

Russell Reconstitution 2017. We are seeing increased demand for names being added to, and deleted from, the Russell 3000 as long holders that track, or loosely track, the index adjust their holdings accordingly. This rebalance typically results in a squeeze in liquidity. Some of the most sought after names due to deletions in the Russell 3000 include: Trovagene Inc. (TROV), Tidewater Inc. (TDW), MannKind Corp (MNKD), and FuelCell Energy Inc (FCEL). Some of the most sought after names, due to additions in the Russell 3000 include: Cloudera Inc. (CLDR), Carvana Co (CVNA), Halcon Resources Corp (HK), Peabody Energy Corp (BTU), and Ultra Petroleum Corp (UPL).

Bullish sentiment for U.S. assets leads to increased IPO activity. This week, Altice USA went public, and the share price rallied in its first day of trading. This is the second biggest IPO of 2017, raising $1.9 billion, putting it just behind Snap, which went public in March. The NYSE President, Tom Farley, recently said “It’s not a great year, it’s a good year, we’ve done 44 IPOs in the NYSE year-to-date. Last year was a terrible year; we only did 38 the entire year”. The next large IPO expected is Blue Apron, which plans to issue 30 million shares of common stock at $15 to $17 each in its upcoming initial public offering, according to a June 19 regulatory filing.

Asia Pacific 

One of Japan’s largest car airbag manufacturers filed for bankruptcy on Monday, paving the way for a sale of the company. Takata Corp, which has been plagued by various lawsuits as a result of a faulty airbag scandal that has led to at least 17 deaths and a worldwide recall, filed for bankruptcy protection in both Japan and the U.S. The filing is likely to take the 84-year old company a step closer to a sale of the firm to Key Safety Systems Inc., a U.S. air bag maker owned by China’s Ningbo Joyson Electronic Corp. Takata is also considering selling its solar-power assets in Japan to raise much needed funds as it faces mounting liabilities as a result of the over 100 million defective air bags that it has to replace. We continue to witness strong securities lending demand for Takata, whose shares tumbled in trading last week and have declined by nearly 90% since the beginning of this year.

China’s domestic equities will join MSCI’s benchmark indexes after three previously unsuccessful attempts, marking a landmark step in the continued integration of the nation with the global financial system. MSCI announced last week that from June 2018, domestic ‘A’ shares will be added to the MSCI Emerging Markets Index, albeit with a much smaller weighting than what was initially envisaged. Although there are continued concerns by investors pertaining to the treatment of suspended securities, daily trading limits, and capital controls, the move by MSCI marks a significant step to the opening up of the $6.9 trillion onshore stock market. Market reaction to the news was relatively muted given the limited impact on short-term inflows and in terms of securities lending, there is unlikely to be any impact in the near term given the lack of a viable offshore lending model for Chinese ‘A’ shares.

Europe 

Yit Oyj looks to build on promising sales. The Finnish construction company has sought to acquire Lemminkainen Oyj as it bids to increase its footprint in northern Europe. With potential combined annual sales of both firms at 3.4 billion euros, the hope is that the added synergies will give the firm more weight in competing for projects against their Swedish rivals Skanska AB, NCC AB and Peab AB. Lemminkainen shareholders will receive 3.6146 shares in the resulting Yit firm with the approval of both shareholders due in an EGM meeting held on September 12th. Borrowers have sought shares in Yit Oyj as they look to take advantage of the potential price fall leading into the merger with Lemminkainen.

Interest increases over Stada Arzneimittel AG takeover. Private equity firms Bain Capital and Cinven put together a 5.9 billion euro takeover offer for the German pharmaceuticals company that was announced in early April of this year. The expiry deadline for shareholders to tender their shares in the deal was this week. A reported 45% of shareholders took up the offer as it appears that the buyout firms will fail to meet the 67.5% target threshold, having already moved the deadline and threshold from June 8th and 75% already. Under German law, the buyers cannot lower the acceptance level or extend the tender more than twice, implying that the takeover will fail. Retail investors and index tracking funds account for 25% of Stada’s capital with both, in this case, seemingly unwilling to tender. Interest has picked up to borrow shares as hedge funds look to buy and not tender holding out for a better deal post-completion. The desk continues to monitor borrower demand and the events as they unfold.