From the Securities Lending Trading Desk

Scientist using  microscope in a laboratory
D
irectional demand is increasing for stocks in the Biotech sector as valuations rebound, while in Asia, a recent sale of bonds by one of China’s leading property developer’s surprised investors and led to a sharp sell-off on its first day. In Europe, short sellers have returned to Africa-focused UK oil exporter Tullow Oil.

Below please find the July 4 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

Fee levels continue to trend higher for SNAP amid limited availability and increased demand ahead of the lock up expiry. According to analysts, nearly 60% of the 844 million outstanding Snap shares will be unlocked on July 31, followed by another 25% on August 31. Historically, we have seen stock prices decline significantly after these expirations. Bloomberg reports that LinkedIn, Facebook, and Twitter dropped an average of 24% in the 30 days before their IPO lock-up expiration and 14% over the final week.

Directional demand is increasing for stocks in the Biotech sector as valuations rebound.  The Nasdaq Biotech Index has outperformed the market so far this year. Helping the rally is the Trump organization’s efforts to reportedly ease regulations which may include measures for which drug makers have lobbied. While some investors feel the worst is over — after prices slumped from the highs of 2016 which were driven by massive mergers and what seemed to be endless optimism — some believe this rally is still in its infancy and the gains may not be warranted. Names such as Novavax, Inc. (NVAX), Xbiotech Inc (XBIT), and Juno Therapeutics Inc (JUNO) have been more heavily located as their shares prices trend higher.

Asia Pacific

A number of small cap stocks plummeted in Hong Kong trading, some by more than 90%, attracting the attention of regulators amid concerns that parts of the Hong Kong market remain open to manipulation. Many of the stocks that fell had previously been flagged by David Webb, who in his book titled “The Enigma Network,” highlighted that the companies were entwined in a complex web of cross-shareholdings which pushed their valuations to unsustainable levels. The sharp declines alarmed Hong Kong regulators amid calls for them to do more to protect investors from extreme volatility and market misconduct. Among the decliners were China Jicheng Holdings Ltd and GreaterChina Professional Services Ltd, which both fell more than 90%. Thirty-eight of the 50 stocks flagged by David Webb fell. We saw short term lending demand for several of the small caps impacted by the drop.

A recent sale of bonds by one of China’s leading property developer’s surprised investors and led to a sharp sell-off on its first day. China Evergrande Group’s record $6.6bn sale of junk bonds in late June was the largest ever in the property and high yield market, with the sheer size of the offering leading to an underperformance on its first few days of trading. The company plans to use the proceeds from the sale for business expansion rather than debt repayments. We have witnessed strong securities lending demand for China Evergrande in recent months, which has been one of Hong Kong’s highest-flying stocks after a staggering rise of over 190% this year.

Europe

Securities lending demand remains strong for Stada after Bain Capital’s offer to buy Germany’s Stada fell through. German generic drug manufacturer Stada Arzneimittel AG (STDAY) recently watched its buyout offer from Bain Capital fall apart. The stock has recovered since the beginning of the week where it opened up approximately 10% down.

Short sellers have returned to Africa-focused UK oil exporter Tullow Oil. Depressed spot crude prices and volatility in the oil market has caused another spike in borrow utilization, which is approaching 75% of the lendable pool. Ongoing weakness in the oil market forced Tullow to book a $600mm charge last Wednesday. This comes after Tullow successfully completed a $750mm rights issue in May to help manage its debt burden.