From the Securities Lending Trading Desk

Illustration of robots assembling a car

Last week, borrowers sought shares of one of China’s leading automakers after it tempered speculation that it was on the verge of a deal to acquire one of Fiat Chrysler Automobiles’ iconic brands.  There was renewed broker demand for Herbalife Ltd. (HLF) as the stock price surged following their announcement of a modified Dutch auction.  Meanwhile in Europe, reports of accounting fraud sent Steinhoff International lower, spurring borrower interest.

Below please find this week’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

There was renewed broker demand for Herbalife Ltd. (HLF) as the stock price surged following their announcement of a modified Dutch auction. Through the auction, HLF will buy back $600 million in shares in the range of $60 to $68 and the company will give an additional cash payment to shareholders that sell shares back if Herbalife were acquired at a higher price than the auction range sometime in the next two years. HLF has been a long term focus of demand. Hedge fund billionaire Bill Ackman has been bearish on the stock, meanwhile Carl Ichan has done all he can to support the company and discredit Ackman’s pyramid scheme allegations. The share price is up more than 11% last week, putting a squeeze on Ackman’s short position.

JinkoSolar (JKS) has been a focus of demand this week as the share price tumbled following analyst downgrades. JKS was one of several alternative energy stocks to see a sharp decline in their share price amid concerns regarding oversupply in 2018. Analysts at Credit Suisse responded to the declining price by downgrading the equity to “neutral” from “outperform.” JKS’ share price remains 55.6% higher year-to-date, despite the recent downward movement. Bears have been focused on JKS and the solar sector in general for some time as slowing sales and possible cuts to federal funding fueled fundamental demand. Currently, short interest on JinkoSolar stands its the highest point since early 2002.

Asia Pacific 

One of China’s leading automakers tempered speculation last week that it was on the verge of a deal to acquire one of Fiat Chrysler Automobiles’ iconic brands. Great Wall Motor announced last Tuesday that there were no formal discussions being held between the two firms and that it may not pursue a takeover of the Italian-American car manufacturer’s Jeep division, despite seemingly suggesting a day earlier that it had wanted to purchase the firm. Any potential deal would probably involve significant challenges for Great Wall Motor, not least with funding the transaction and obtaining Chinese regulatory approval in the face of additional restrictions on capital outflows from the mainland. In recent months, analysts have become more cautious on Great Wall’s prospects as fierce competition among domestic brands and rising costs have seen the car makers’ profits slide. We have witnessed moderate securities lending demand for Great Wall Motor in recent weeks, whose shares have rallied by over 40% this year despite these concerns.

Shares of Sunac China Holdings Ltd surged after the company announced that six-month net income may jump to a level 15 times higher than a year earlier. Sunac China Holdings Ltd shares rose over 7% in Hong Kong trading as the company cited gains from its aggressive acquisition spree plus improved gross margin as the reason for the rise in net income. Sunac China Holdings Ltd’s $6.5 billion July acquisition of Dalian Wanda Group’s theme parks raised concerns the developer’s high debt levels could lead to a ratings downgrade. We have seen declining lending interest in Sunac China Holdings Ltd as shares rally.

Europe 

Provident Financial shares tumbled off the back of a regulatory probe. One of the UK’s largest doorstep lenders fell as much as 75% last week after reporting what analysts describe as a “quadruple whammy,” including the CEO stepping down, a profit warning, removal of their dividend and an FCA investigation. The firm, which lends at high interest rates to customers who struggle to get credit elsewhere, said it now expects to make a net loss of between 80-120 million this year after the reorganization of its debt collection division turned out to be disastrous for the firm. The poor earnings forecast was multiplied by the news that the FCA was investigating a repayment option plan that the lender offers through its Vanquis Bank, an investigation that could potentially bring compensation claims in the future.

Reports of accounting fraud sent Steinhoff International lower. The South African discount retailer that operates throughout Europe, Africa and Australasia fell by as much as 14% this week after German business magazine Manager-Magazin reported potential accounting fraud. The firm’s shares, which are dually listed on both the South African and German indexes, have both seen interest from funds looking to short the stock after the news was reported. The magazine stated that individuals being investigated in the matter include CEO Markus Josste as well as other senior managers who are alleged to have inflated revenue reported on the balance sheet by more than EUR 100 million. Steinoff responded to the report, describing it as “wrong and misleading,” however we continue to monitor as borrower demand remains high.