From the Securities Lending Trading Desk

Young pizza courier riding on scooter

This week, bearish sentiment in Domino’s Pizza Enterprises has reached record levels on concerns over its future sales strategy.  We are seeing fee levels trending higher for Pandora Media Inc. (P) as the share price has lost nearly 35% in November. Meanwhile in Europe, Astaldi has drawn attention from the Italian Market Watchdog Consob as it announces rights issue.

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
Fee levels are trending higher for Pandora Media Inc. (P) as the share price has lost nearly 35% in November. We are seeing increased bearish sentiment amid concerns including balance sheet pressures and a turnaround plan that is seemingly fraught with execution risks. Most notably, declining usage figures are challenging P’s ability to grow ad inventory which directly impacts revenue. There has been speculation that Sirius XM may look to take the company over completely, as they have invested roughly $480 million in convertible preferred shares. This represents 19% of Pandora’s outstanding stock, or 16% on an as-converted basis. Additionally, they control three board seats, including the chairman position. Directional demand is expected to continue and Pandora remains a key focus of brokers and lending agents.

One of the market’s largest shorts, SNAP, continues to be in focus as the share price declines, demand remains strong, and the company’s revenues disappoint. Last week Snap Inc. disappointed investors yet again after reporting third quarter revenue that failed to meet market expectations and losses that were larger than expected due to high costs. As a result, the share price is down 17% this week and down more than 50% from the high of $27.09, which was reached shortly after the company went public back in March. Several analysts have downgraded the stock and set price targets in the $11 to $14 range. While some investors view the decline as a potential signal to buy, others are selling the shares as they look to limit losses on their investment. Long-holder sales in the securities lending market are resulting in a squeeze in liquidity and are expected to push fee levels higher in the short term.

Asia Pacific
China’s largest appliance maker announced the sale of convertible bonds last week joining other Chinese corporates in raising funds by monetizing their stock market holdings. Haier Electronics Group, a subsidiary of government-controlled Qingdao Haier Co in China, raised $1.3 billion through the sale of zero-coupon bonds which are exchangeable into shares of its Hong Kong listed unit. The firm plans to use the proceeds of the sale to repay debt and for general purposes. We saw limited securities lending demand for Haier Electronics, which has seen its share price rally by approximately 80% this year.

Bearish sentiment in Domino’s Pizza Enterprises has reached record levels on concerns over its future sales strategy. Australia-listed Domino’s Pizza Enterprises said it would stick to its forecast to grow by 20% this year even as it has acknowledged a slowdown in sales in recent months. Although the company is investing more in technology, including the usage of drones for deliveries, some investors have expressed doubts of the sustainability of its business model as it faces higher labor wage rates across its stores. We have seen strong securities lending demand in recent weeks for Domino’s Pizza whose shares have declined by almost 30% this year.

Europe
Astaldi has drawn attention from the Italian Market Watchdog Consob as it announces rights issue. The Rome-based builder announced on Thursday that it is planning a $232 million capital increase by way of a rights issue to strengthen the firm’s financial structure. There has, however, been increased scrutiny over the announcement as the previous day saw the share price fall 17% leading the Italian regulator Consob to look into the potential of insider dealing taking place. On Thursday, the stock plunged an additional 28% reducing the company’s market capital to EUR 338 million. Lending fees have spiked off the back of the news as funds look to short the stock while also looking for any potential spread offered during the right issue.

Meal kit maker HelloFresh went public in Frankfurt. HelloFresh is growing roughly 3x faster than beleaguered competitor Blue Apron, but hedge funds are willing to pay lofty fees to borrow HelloFresh shares. Lengthy lockup periods and a small free float are contributing to a shallow lending pool, driving fees upward despite low trading volumes in the cash market. HelloFresh priced its IPO in the middle range of its target range at EUR10.25 and closed the week at EUR9.025.