From the Securities Lending Trading Desk

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Last week, shares tumbled in one of Australia’s top electronics retailers after reporting poor profit guidance for 2018.  Dutch Auctions were in focus in the US last week as both Amgen Inc (AMGN) and Greenhill & Co., Inc (GHL) recently announced plans to repurchase shares.  Fallout from Carillion has spread across UK companies and given rise to increased securities lending demand.

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

Dutch Auctions were in focus last week as both Amgen Inc (AMGN) and Greenhill & Co., Inc (GHL) recently announced plans to repurchase shares. For corporate repurchases, a range of prices is set by a company within which shareholders are invited to tender their shares. The tender offer is open for a specific period of time and the amount of stock to be purchased is stated as well (subject to proration). When there is a difference between the tender price and the market price, there is lending opportunity. AMGN is offering to purchase its common stock for cash for an aggregate purchase price up to $10 billion, at a single per-share purchase price not greater than $200.00 and not less than $175.00. AMGN closed on 2/15 at $183.60 per share. GHL is offering to purchase its common stock for cash for an aggregate purchase price up to $110 million, at a single per share purchase price not greater than $20.50 and not less than $18.50. The stock closed at $20.40 on 2/15. We anticipate continued demand for both of these stocks as we approach critical dates.

Sears Holdings (SHLD) remains a long term focus of demand as the share price fell to a 5-year low of $2.07 on 2/12. According to CNBC, SHLD is expecting to “record an impairment charge tied to its trade name of between $50 million and $100 million for fiscal 2017.” This is in addition to charges of $381 million for 2016 and $180 million in 2015. The retailer also recently said they expect Q4 2017 sales of $4.4 billion, compared with revenue of $6.1 billion a year ago. The retail sector as a whole continues to draw attention. Earlier this week, the U.S. Commerce Department reported “retail sales dipped 0.3 percent in January, the worst decline in 11 months.” This was below analyst expectations of an increase of 0.2 percent. Other names in the sector continue to garner attention, including JC Penney Co Inc (JCP), Under Armour Inc (UAA), and GNC Holdings, Inc. (GNC), as bearish sentiment remains strong.

Asia Pacific

Shares tumbled in one of Australia’s top electronics retailers after reporting poor profit guidance for 2018. JB Hi-Fi Limited, the operator of a chain of electronics retail stores, reported record first half net profits of A$151.7 million ($120 million), but warned that it will face pressure on revenue in 2018. The company cited increased competition and a focus on sales of lower-margin goods as factors in projecting lower than expected guidance for the remainder of the year. Although the launch of Amazon’s product offering three months ago has yet to have a direct effect on the retailer, it still remains a threat for the company in the long-term. We have seen strong securities lending demand for JB Hi-Fi’s shares in recent weeks, which fell by 8% after the release of its results before recovering later in the week.

Domino’s Pizza’s shares plunged after reporting poor profit growth. The pizza operator reported last week that underlying net profit for the first half of its accounting year rose to A$62.9 million ($50 million), falling short of various forecasts of around A$67 million. The pizza chain downgraded its forecasts as it battles increased competition, declining overseas revenue in markets such as Japan and a scandal that its franchisees were deliberately underpaying and exploiting workers. The company also reduced its expectations for local sales growth and analysts remain skeptical of Domino’s international expansion plans. We have seen strong securities lending demand for Domino’s in recent weeks, which has been one of the worst performers in the Australian Stock Exchange in the past year.

Europe

The securities lending market is feeling the liquidity squeeze in German stocks due to new regulation. Liquidity traps have appeared following the recent change in German tax regulation. In-scope clients now have to make a tax return to the German tax officials if stocks are held over record date. While the clients and market digest these requirements, a lot of the liquidity has been withdrawn. Those clients that are either willing to file a tax return, or are out of scope, are able to achieve a premium on stocks such as Metro, K+S, ElringKlinger, Suedzucker, Evonik Industries, Hellofresh, etc.

Fallout from Carillion has spread across UK companies and given rise to increased securities lending demand. This week Galliford announced plans to raise £150m to cover additional financial obligations arising from contracts related to Carillion for Aberdeen Western Peripheral contract. Other UK companies which have seen volatile price movements in their stock price are Interserve, Van Elle Holdings, Balfour Beatty, and Morgan Sindall.