From the Securities Lending Trading Desk

Liquidity has tightened in Spanish discount grocery store chain Distribuidora Internacional de Alimentacion SA (DIA SM). Insys Therapeutics, Inc. (INSY) remains a focus of fundamental demand as the share price declines amid kickback scandals and greater scrutiny on the company’s lead drug, Subsys. Meanwhile, China’s largest shipping company announced plans to buy out of its main rivals in another sign of consolidation in the embattled industry.  

Below please find the July 18 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

Insys Therapeutics, Inc. (INSY) remains a focus of fundamental demand as the share price declines amid kickback scandals and greater scrutiny on the company’s lead drug, Subsys. The fentanyl-based painkiller, Subsys, is INSY’s lead drug with 2017 sales of roughly $144.25m. INSY attributed 100% of the latest quarterly revenue to Subsys and analysts predict it will represent 90% in 2020. The drug, which was originally described as a “breakthrough cancer pain” treatment, is far more powerful than morphine. However, the drug is also a highly addictive opioid and Attorney General Jeff Sessions is looking to crack down on its distribution. Recently, two sales representatives pleaded guilty “to engaging in schemes to pay kickbacks to medical practitioners to prescribe a drug containing the opioid fentanyl.” The share price has declined 15% from the six-month high of $14.70 back on May 31 while the industry group rose during this period.

Applied Optoelectronics Inc. (AAOI) has been a focus of directional demand. Slowing growth in China coupled with industry demand downturn has created price volatility. On June 2, AAOI rallied to a 52-week high of $74.68, only to fall more than 21% by the end of the month. The price is on the upswing again, closing at $72.74 on July 12. AAOI has been a focus of short sellers as some investors have been concerned with a slowdown in Chinese telecom growth and a cyclical industry demand downturn. As a counter to this theory, many bullish investors remain convinced that demand for hyperscale data centers from giants such as Facebook and Amazon will continue and offset these concerns. Fee levels have been trending higher amid limited availability and high utilization.

Asia Pacfic

Sunac China Holdings Ltd.’s credit rating was cut following the developer’s acquisition of hotels, land, and projects from Dalian Wanda Group Co. for a record sum of USD 9.2billion. Fitch lowered Sunac China Holdings Ltd’s rating to junk status citing the company’s “acquisitive business approach.” The price paid by Sunac China Holdings Ltd, including the debt it will take on, is almost as large as Sunac’s total net adjusted debt of 89 billion yuan at the end of last year. It was also disclosed that Dalian Wanda Group Co. will arrange a bank loan to fund 29.6 billion yuan of the 63.2 billion yuan purchase. Sunac China Holdings Ltd is now China’s most indebted developer and is likely to face further downgrades. We saw strong lending interest for Sunac China Holdings Ltd.

China’s largest shipping company announced plans to buy out of its main rivals in another sign of consolidation in the embattled industry. State-owned Cosco Shipping Holdings said it would buy Orient Overseas International Ltd in a $6.3bn all-cash deal, in a move that will make the combined entity the 3rd largest container shipping firm in the world and the largest through the Pacific Ocean. Consolidation in the shipping sector has been a hot topic of late as the industry has struggled as a result of sluggish global trade, excess capacity, and depressed prices. We witnessed increased securities lending demand for both Cosco Shipping and Orient Overseas upon announcement of the deal.

Europe

Carillion PLC’s (CLLN LN) share price decreased last week, causing an increase in demand. The UK construction service provider saw its share price fall by almost 69% last week after a flood of negative press. Last Monday, the firm relieved Chief Executive Richard Howson of his position while suspending this year’s dividend and issuing a profit warning. Analysts fear that the firm faces additional project write-downs and will have to raise funds in order to shore up its balance sheet after flagging $1.09 billion in surprise contract provisions. Demand from the borrower community has increased off the back of the news with a steady increase in levels throughout the week. The desk continues to monitor the situation and considers Carillion a name to watch going forward.

Liquidity tightened in Spanish discount grocery store chain Distribuidora Internacional de Alimentacion SA (DIA SM). The desk has seen liquidity tighten in the Spanish firm as we approach this week’s record date with short interest in the stock having risen to highs of 25%. The stock price surged during the 2011-2013 recession after consumers saw it as the cheapest option in a time of austerity. In recent years however, the grocer has seen a change in consumer mindset as the Spanish economy improved and consumer tastes changed. Despite the rise in short interest, the share price has somewhat recovered in 2017 compared to the back-end of 2016, however analysts still highlight concerns on future growth as they question its ability to rebrand itself and highlight its vulnerability to emerging market sales.