From the Securities Lending Trading Desk

Airplane in the sky and cloud at sunset

Demand has increased for Asia’s largest international airline after its chief executive officer admitted to a “disappointing” first half financial performance. There is increased fundamental demand for Virtu Financial Inc. (VIRT) as high-frequency firms face headwinds from the rising cost of infrastructure and low volatility. Meanwhile, Paris’ biggest landlord, Gecina, is embarking on a rights issue to fund expansion.

Below please find the July 25 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

We have seen an increase in bearish bets for Fred’s Inc. (FRED). The share price recently fell to a 52-week low following the collapse of a merger deal and lower than anticipated June sales. In January FRED’s share price rallied on the initial merger news between Walgreens Boots Alliance Inc. and Rite Aid Corp. that could have allowed Fred’s to acquire up to 1,200 Rite Aid stores. However, bearish sentiment also increased in January as many investors questioned if the deal would go through. Ultimately, last month the companies announced a new agreement that terminated the existing merger deal. In more bad news for FRED, total sales for June dropped 5.3% year-over-year from $208.5 million in June 2016 to $197.5 million in June 2017. Fee levels are trending higher amid bearish sentiment.

There is increased fundamental demand for Virtu Financial Inc. (VIRT) as high-frequency firms face headwinds from the rising cost of infrastructure and low volatility. Bloomberg recently reported that “Market makers in U.S. stocks produced $1.1 billion in revenue last year, compared with $7.2 billion in 2009,” according to estimates from Tabb Group LLC. In the 2000’s, high-frequency traders (HFTs) reaped the benefits of advanced technology and vast understanding of the electronic marketplace to carry out or cancel trades. However in today’s environment, even the fastest execution speeds are outweighed by low volatility, causing diminished returns. VIRT is a recent focus name, with utilization and fee levels increasing nearly 18% and 39%, respectively, according to Markit.

Asia Pacfic

Chinese Estates Holdings Ltd announced that it now owns more than 5% of indebted developer China Evergrande Ltd after purchasing shares in April. Chinese Estates Holdings Ltd bought HK$8.1 billion (USD $1 billion) of China Evergrande Ltd shares and provided a significant boost to investor confidence. China Evergrande Ltd has been in long term lending focus after an acquisition spree in 2016 turned it into China’s most indebted developer. Analysts estimate that China Evergrande Holdings Ltd net gearing may now have fallen to 200% from 432% last year. We have seen declining lending interest for China Evergrande Ltd as shares rally.

Shares in Asia’s largest international airline fell in trading last week after its chief executive officer admitted to a “disappointing” first half financial performance. Cathay Pacific Airways’ CEO Rupert Hogg said that passenger yields, a measure of how much an airline earns from carrying a passenger per kilometer, declined by 0.5% in the first six months of this year. Cathay Pacific is currently implementing a three-year strategy to transform the premium airline as it battles strong competition from mainland Chinese and Middle Eastern carriers and recovers from a heavy write down due to a wrong-way bet on fuel hedging last year. We have seen an increase in securities lending interest in the airline in recent weeks which, despite its recent challenges, has seen its share price increase by nearly 20% this year.

Europe

The French capital’s biggest landlord Gecina, in embarking on a rights issue to fund expansion. The real estate company that holds over 90% of its assets in Paris announced plans to raise $1.2 billion in order to finance the purchase of smaller rival Eurosic. The deal will make the resulting entity Europe’s largest office landlord in a move that analysts have said will look to capture potential business in the fallout from Brexit. Each shareholder will be offered one new share at a price of 110.5 for every seven they hold with the subscription period running from the July 21 to the August 2. Demand for the ordinary shares was present last week, however, we are seeing heightened interest in the rights line due to the over-subscription offer. Typically with French rights issues, there is the potential for investors to over-subscribe for new shares looking to buy any discounted shares that other investors decided not to take up.

Cinven and Bain Capital have increased their offer for Stada Arzneimittel AG. The past week saw the two private equity firms attempt their second bid to acquire the German pharmaceutical company after receiving a key regulatory exemption. Typically firms are required to wait a year before submitting another offer. The new offer has been raised to 66.25 euros a share and a 63% acceptance level, an increase of 25 euro cents and reduction in acceptance of 12%. The first attempt to buy the drug maker was hampered by funds not looking to tender their stock in order to capture a better deal in the takeover. Demand for Stada ordinary shares has been present since the first offer, but interest in the stock has risen after the news broke this week.