From the Securities Lending Trading Desk

Hand with orange car and keys

Hertz (HTZ) cancelled plans to redeem debt causing shares to plummet >20% and short demand to increase. In Europe, we’ve seen securities lending demand rise off the back of earnings reports.  Meanwhile in Asia , shares in Standard Chartered Plc fell sharply in Hong Kong trading after the company warned investors about its growth prospects and did not reinstate its dividend. 

Below please find the August 8 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

Hertz (HTZ) cancelled plans to redeem debt causing shares to plummet >20% and short demand to increase. After Hertz debt redemptions were canceled without any explanation, analysts can only assume that management feels obligated to hold onto its cash rather than redeem as much as $450 million in 2019 debt, which may signal trouble ahead for the company. One analyst suggested the cancellation may be an indicator that the second-quarter earnings due on today will probably be worse than expected. Hertz has been taking on debt in a gamble to overhaul its supply of cars in hopes to raise rental prices with newer, bigger sport utility vehicles. This has left investors concerned about losses as the strategy has battered earnings.

Discovery Communications Inc. (DISCA) agreed to buy Scripps Networks Interactive Inc. (SNI) for $11.9 billion in cash and stock in an effort to unite ownership to adapt to an ever changing television landscape. The deal has forced Viacom to abandon their efforts to acquire Scripps. DISCA has been struggling with shrinking audiences as consumers drop cable subscriptions and migrate to other outlets such as Netflix. They will use the Scripps programming to strengthen the company’s international reach and expand distributions options. However, analysts remain skeptical as longer term issues that face the industry remain; such as declining viewership and new online distributors offering “skinny” bundles with fewer channels. There has been mild demand for DISCA. The deal is not expected to close until the first quarter of 2018 and we expect demand to ramp up in the coming months.

Asia Pacific

Shares in Standard Chartered Plc fell sharply in Hong Kong trading after the company warned investors about its growth prospects and did not reinstate its dividend. The emerging market-focused lender cited “extraordinary uncertainty” as the reason for the cancelled dividend payment. The future regulatory regime for bank capital requirements (Basel IV), new accounting standards (IFRS-9) and weak earnings were cited as the main factors in the cancellation of the dividend. Revenue dropped in all but one of the bank’s geographical regions, with Greater China and North Asia recording 9% growth in the period. We saw a sharp increase in lending demand for Standard Chartered Plc Hong Kong listed shares following the announcement.

Sharp Corp reported a third straight quarter of profit, signaling the company is bringing to an end three straight years of losses. Shares in the Japanese electronics manufacturer have more than quadrupled following a takeover by Taiwan’s Foxconn in August 2016. Sharp Corp’s results showed it is making significant headway overhauling its liquid-crystal display business, which has been profitable for three consecutive quarters. Despite the share price increase over the past year we continue to see strong lending interest for Sharp Corp.

Europe

Re-financing in Germany is a common theme. The desk is seeing a number of hot names in Germany under pressure from re-financing. Names such as Wirecard, K + S and Rocket Internet have seen their share price rally 61%, 35% and 20% respectively this year leading to a drop in lending levels and utilization over the past month. The names historically have been long term directional shorts. Re-finance pressure is due to funds exiting trades and buying back stock leading to an oversupply in the market and less demand.

Securities lending demand rises off the back of earnings reports. Last week we saw renewed interest in the French steel and alloy tube manufacturer Vallourec SA after their share price fell by 20% since it reported earnings. Concerns still remain about the full recovery in oil prices as well as the move to renewable energy which doesn’t require the firm’s steel pipes used in conventional power stations. CGG SA, a geophysical equipment and service provider, posted a second quarter net loss of 169.9 million euros after one off charges rose to USD 95 million caused by restructuring costs and a non-cash charge related to the Global Seismic Shipping setup in the year. Finally, the mining and metals company Nyrstar NV missed analyst’s estimates reporting a H1 2017 EBITDA figure of EUR 111 million an increase of EUR 21 million many due to higher commodity prices.