From the Securities Lending Trading Desk

Detail of bridge pylon, Bracebridge, Muskoka, Ontario, Canada

In Europe this week, French steel producer Vallourec issued an EUR 200mm convertible bond. We have seen strong demand for Secoo Holding Ltd (SECO) as their share price plummeted nearly 40% since going public. Meanwhile in Asia, NetDragon Websoft, one of China’s leading developers of online games and mobile applications, turned to the capital markets for funding of an expansion of its overseas education business.

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 

This week D.R. Horton, Inc. (DHI) acquired 75% of the shares outstanding of Forestar Group Inc. (FOR) sparking demand. Shares holders of FOR could elect to receive $17.75 in cash or new shares of Forestar common stock. Both cash and stock elections are subject to proration. With FOR trading in the range of $17.30 to $17.15 last week, the cash option was strongly favored, as such stock elections were sought after by brokers. FOR’s share price has been volatile, trading above and below the 50-day average within the week. FOR delayed opening on Thursday morning ahead of news. For clients electing stock or taking no action, we were able to negotiate a cents per share payment.

We have seen strong demand for Secoo Holding Ltd (SECO) as their share price plummeted nearly 40% since going public. The initial public offering (IPO) by SECO raised $110 million after pricing at $13 per American Depositary Share (ADS). Shares will trade on the Nasdaq. Secoo is Asia’s largest online integrated upscale products and services platform as measured by gross merchandise volume in 2016. This was the first launch of an e-commerce IPO since Alibaba’s IPO 36 months ago. In related news, there was also slight demand for BEST Inc. (BSTI), the supply chain technology company backed by Alibaba, which debuted on 9/19, but as the share price trended higher, we saw demand dwindle. BSTI was the largest US IPO of a Chinese firm year-to-date. Finally, this week marked the most active week for IPOs since June, with investors looking to raise more than $1 billion from seven initial public offerings this week, three of which from Chinese companies. Biotech firm Zia Lab was the final company and looks to raise $100 million in their IPO.

Asia Pacific 

Two of Japan’s largest banks plan to merge three regional banks in western Japan, the latest sign of consolidation in the financial sector. Sumitomo Mitsui Financial Group Inc. and Resona Holdings Inc., announced last week that they have agreed to establish a joint holding company and consolidate the operations of three Kansai-based regional banks, Kansai Urban, Kinki Osaka and Minato Bank. The new holding company will be called Kansai Mirai Financial Group (KMFG). Resona Holdings will hold a 51% equity stake in KMFG. The move comes as Japanese regulators continue to press regional banks to merge as credit demand remains weak and a near-zero interest rate environment erodes loan profitability. We witnessed increased securities lending demand for Kansai Urban and Minato Bank following the announcement of the merger.

One of China’s leading developers of online games and mobile applications turned to the capital markets for funding of an expansion of its overseas education business. NetDragon Websoft said it placed 38.5 million shares last week at HKD $25.40 per share with the estimated $125 million in proceeds to be used for its expansion into Russia and Turkey. The company plans to launch a “social commerce” service to students and parents in early 2018 and has turned its attention to its education segment which is expected to generate 2 billion RMB ($300 million) in 2018. We witnessed strong securities lending demand for NetDragon after the announcement of the placement.

Europe 

Short interest climbed for Uniper shares, as Fortum agrees to buy E.On’s stake and offer EUR 22 per share to all Uniper shareholders. Event driven funds have been buzzing as speculation mounts for the EUR 8.05 billion deal. The deal price represents a 36% premium since speculation at the end of May, and there may be a second offer as the spot price is trading above 22 euros at the time of this writing. Stock loan fees are expected to increase heading into the tender deadline, which is pending.

French steel producer Vallourec issued an EUR 200mm convertible bond. Stock loan fees continue to rise for Vallourec, which has been a popular sector play over the past several years. Short interest has climbed with share price as convertible arbitrage strategies look for shares to hedge their long bond positions.