From the Securities Lending Trading Desk

The desk has seen renewed bearish sentiment for Snap Inc. (SNAP) in the U.S this week as shares lost 25% of their value. A scathing research report by a leading short-seller sent shares in Hong Kong-listed Samsonite tumbling. Whilst in Europe lending fees increase as a direct result of the May MSCI Semi Annual Index Review.

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

Directional demand remains strong for Canadian cannabis stocks as investors question whether there is enough room for growth to justify the companies’ high valuations. In general, marijuana stocks have struggled this year after much hype in 2017. Canada could pass a bill this summer for recreational use but until that happens it’s hard to gauge just how much demand there truly is in the market. If the bill is to be delayed for any reason, as some analysts expect, it could result in a massive sell-off. Some of the more sought-after names with high borrowing costs include Canopy Growth, Aurora Cannabis, Aphria Inc., and Cannabis Wheaton.

We saw renewed bearish sentiment for Snap Inc. (SNAP) as shares lost 25% of their value following a disappointing first-quarter earnings report earlier this month. The popular photo-sharing and chat app saw revenue climb 54% from the prior-year quarter to $230.7 million; however, the results fell well below the $244.5 expected. The company’s 191 million daily active users, which grew 15% year-over-year, also failed to impress investors as analysts were expecting 194.2 million users. Adding to investor disappointment, Snap executives said they anticipate a slowdown in revenue growth next quarter as a result of lower ad prices. At least three analysts cut their ratings, as Wall Street blamed the company’s controversial app redesign and said management must act quickly to keep users from fleeing to Facebook’s Instagram app, according to one source. Fees to borrow trended higher due to the new demand.

Asia Pacific

Media reports of a proposed merger between two UK based banks received a lukewarm response by both analysts and investors alike. The Financial Times reported last week that Barclays was potentially exploring a merger with rival international banks, one of which included a tie up with Asian-focused Standard Chartered Bank. Barclays has recently been pressured by activist investment fund Sherborne, who has recently built up a 5.4 per cent stake in the bank, to restructure its operations and to reduce the size of its under-performing corporate and investment banking division. Analysts however have questioned the logic behind such a deal as the focus of both banks are not aligned, and neither of their existing problems can be solved by merging together. We saw an increase in securities lending demand for HK-listed Standard Chartered last week, whose shares have remained largely flat so far in 2018.

A scathing research report by a leading short-seller, sent shares in the world’s largest-branded luggage maker tumbling last week. Blue Orca, which was founded by former Glaucus Research Group research director Soren Aandhal, published a report questioning Samsonite International SA’s accounting and corporate governance standards. Blue Orca alleged that Samsonite has been concealing its slowing growth with debt-funded acquisitions and has been inflating its profit margins with questionable accounting practices particularly in relation to its recent takeovers. We witnessed increased securities lending demand for Hong Kong-listed Samsonite, which fell by over 10% in a single session in trading last week and in the process nearly wiped out its gains made in the past year.

Europe

Lapsed Sika convertible bond preferential rights in demand heading into expiry. Swiss construction material manufacturer Sika offered shareholders rights to purchase CHF 1.5b worth of convertible bonds due 2025. Many non-Swiss holders were unable to subscribe to the offer, bringing arbitrageurs bidding for lapsed rights that they can in turn monetize by capturing the discount. Since rights cannot be sold, rightholders are able to monetize their rights through lending via SBL.

MSCI rebalance drives securities lending demand and causes supply squeezes.  This week the desk has seen lending fees increase as a direct result of the May MSCI Semi Annual Index Review. Names that have experienced the greatest squeeze in liquidity include Steinhoff International (SNH SJ), Sibayne Gold (SGL SJ), Brait (BAT SJ), Boka Westminster (BOKA NA) and Alice NV (ATC NA). The deletions from the index mean MSCI index tracking funds sell their positions and thus reduce the securities lending supply. Borrowers on the other hand who wish to maintain their positions in these names battle it out to find non MSCI tracking supply which is causing fees to spike. MSCI deletions are effective by the end of the May therefore the desk believes liquidity should remain tight for the next couple of weeks.