From the Securities Lending Trading Desk

Green microchip set in a blue printed circuit board

The proposed sale of one of Toshiba Corp’s prized businesses is starting to gain more momentum after months of wrangling between the Japanese conglomerate and one of its key partners in a manufacturing joint venture. We are seeing fee levels climbing higher again for RH as the share price rallied 50% on better than expected second quarter results, squeezing shorts.  Meanwhile in Europe, Liberbank SA is the latest European lender to issue a rights issue in order to clear up its balance sheet.

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 

Last week there was an uptick in fundamental demand for Trivago N.V. (TRVG) as the share price fell to lows after the company cut guidance. Recently the online hotel search platform reported “that it expects revenue growth of 40% this year, down from the 50% it was targeting earlier in the year” blaming “negative impact on revenue per qualified referral in making the algorithmic adjustment.” As a result, TRVG saw their share price sink to a six month low of $11.91, down roughly 50% from the 52-week high of $24.07 on July 19, prompting analysts to downgrade the stock. Hurricane Irma and concerns about soft profit forecasts are additional headwinds for the sector and has resulted in analysts taking a closer look at TRVG and their competitors, including Priceline Group Inc. (PCLN) and Expedia Inc. (EXPE).

Fee levels are climbing higher again for RH as the share price rallied 50% on better than expected second quarter results, squeezing shorts. RH has started to show signs of stabilization in their core business amid turnaround efforts, including consolidation of their distribution network, lower inventory levels and better sales and profitability. However, bears remain concerned with “the consumer environment, execution risks, high debt leverage and valuation” which is fueling directional demand. The share price has been volatile in recent months as RH’s business and reports from management had been unpredictable, e.g. RH just lowered yearly forecasts just last quarter. As uncertainty surrounds RH, short interest remains strong with nearly 50% of the float sold short. Despite fluctuating demand and liquidity, the focus of both bears and bulls remains concentrated on RH.

Asia Pacific 

The proposed sale of one of Toshiba Corp’s prized businesses is starting to gain more momentum after months of wrangling between the Japanese conglomerate and one of its key partners in a manufacturing joint venture. Toshiba is weighing a proposal by Western Digital that would involve the US chipmaker dropping a lawsuit, renegotiating the terms of its joint venture, and pulling out of a consortium that is bidding for the Japanese firm’s flash memory business. This new development may provide the impetus for the Japanese firm to finally make a decision on the sale of its chip business which it needs to do soon as it faces increasing pressure from its main lenders to plug a large hole in its balance sheet following a multibillion dollar write-down of its nuclear power equipment business. We have witnessed a gradual increase in securities lending demand for Toshiba in recent weeks, which has seen its shares rally by over 30% since the beginning of August.

Two years after listing shares on the Tokyo exchange, government owned postal giant Japan Post Holdings Co Ltd announced a one trillion JPY share offering. The Ministry of Finance planned to offer over one trillion yen of Japan Post Holding Co Ltd shares to local and international investors as early as of September 11 . The Ministry of Finance has been planning the share offering since January however, the sale was delayed by write-downs in Japan Post Holdings Co’s investments, plus a scrapped attempt to purchase a stake in a real estate company. Japan Post Holdings Co Ltd will be added the Nikkei 225 Stock Average on October 2, which could provide a boost to the share sale and encourage passive funds to participate. We have seen a strong increase in lending demand following the share sale announcement and Nikkei inclusion.

Europe 

Convertible bond activity has heated up as funds look to hedge their positions. A number of firms across the Euro area have announced plans this week to release convertible bonds with many analysts highlighting Thursday’s ECB meeting as the catalyst. In Germany, Capital Stage (CAP GY) and Qiagen (QIA GY) both released notes. CAP GY raised EUR 97.3 million in a hybrid deal with QIA GY issuing $350 million cash settled convertible notes. Swiss based technology solutions provider AMS is looking to raise £350 million by way of a convertible bond due in five years. Nyrstar, a Belgium based miner, is raising EUR 100 million of additional unsecured notes due in 2024 while also offering a voluntary tender in the 2018 note for cash. The desk has seen demand increase in these names as funds look to hedge their positions while the firms themselves are keen to re-finance existing debt as sentiment grows that the ECB will potentially raise interest rates.

Liberbank SA is the latest European lender to issue a rights issue in order to clear up its balance sheet. Shares in the Spanish provider plunged as much as 29% this week, as the bank announced plans to raise EUR 500 million by way of a rights issue. The stock is currently under a short selling ban that was put in place back in June because of the similarities it had with failed bank Banco Popular and its exposure to toxic real estate loans. Proceeds from the rights offering are to be used to bolster coverage of its non-performing assets with the board due to approve the offering on the 9th October. The desk has seen interest grow in the name this week with many funds waiting to see if the short selling ban, which is due to finish next week, will be lifted or extended.