From the Securities Lending Trading Desk

Demand for ETFs that track U.S. high-yield corporate bonds has been strong in recent months as hedging and short interests rise. Japan Display Inc. shares slumped to a record low following media reports that Apple Inc will use OLED screens for all models to be released in 2019. In Europe, Informa PLC is to acquire UBM PLC. in a cash and stock deal.

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

Demand for ETFs that track U.S. high-yield corporate bonds has been strong in recent months as hedging and short interests rise. We have seen strong demand for SPDR Bloomberg Barclays High Yield Bond ETF (JNK), iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and this week there was increased demand for The Xtrackers USD High Yield Corporate Bond ETF (HYLB). According to Bloomberg, ETFs that invest in stocks continue to grow and see gains (investments in ETFs grew 56% on 5/31), while funds that buy bonds and loans had losses. HYG has the steepest of these outflows at $307mm. Some investors are concerned there is a liquidity mismatch between these ETFs and the underlying bonds. In addition, muted primary issuance, credit upgrades and defaults have caused the corporate high yield market to contract by 1% year-to-date through May.

We have seen an uptick in demand for Blue Apron Holdings Inc. (APRN) as the share price has rallied from the 52-week low of $1.77 back on 4/06/18. The rally came after supermarket chain Kroger Co. said it would pay $200 million for Home Chef, causing many to speculate APRN could be acquired next. Despite the recent rally to roughly $3.00 per share, APRN’s share price remains well below their IPO price of $10.00 back in June 2017, due to many investors’ concerns with growing competition from the likes of Amazon and other retail giants. Other headwinds, meal kit companies face high customer acquisition costs and low retention rates. As more bearish investors seem to doubt the recent rally is warranted and sustainable, we are seeing increased demand and rising fee levels.

Asia Pacific

The uncertainty over whether the historic summit between the leaders of the United States and North Korea this month will take place, has resulted in increased volatility for a number of South Korean equities. Companies in the defence, construction and utilities sectors swung between gains and losses throughout the month of May as their stock performance is closely correlated to the long-term outcome of any negotiations. We have seen strong securities lending demand in recent weeks for construction and utilities firms Doosan Heavy, GS Engineering, Hyundai Rotem and Samsung Engineering, which have witnessed significant rallies in their share price in the past month after the success of the North and South Korea summit in late April. However, they have faltered in recent weeks and conversely defence companies such as Hanwha Aerospace and Korea Aerospace have seen a resurgence due to increasing scepticism by some analysts that the proposed talks, should they even take place, may not result in a positive outcome in the near term.

Japan Display Inc. shares slumped to a record low following media reports that Apple Inc will use OLED screens for all models to be released in 2019.  If the reports prove to be true, the new Apple Inc strategy will retire all LED screens which are currently produced by Japan Display Inc and Sharp Corp. Shares in Japan Display Inc and Sharp Corp fell 21% and 4.5% respectively, following the release of the report. However, analysts later expressed uncertainty about the details the document contained and their accuracy. We have seen strong securities lending demand in the past week for Japan Display Inc.

Europe

Informa PLC is to acquire UBM PLC. in a cash and stock deal. UBM shareholders may elect for a combination of cash and stock, with the mix-match offer of GBP 1.63 and 1.083 Informa share per UBM share. Election arbitrage opportunities will be present for UBM stock, where max cash is currently the desired election to borrow. Fees may trade in the mid to high range heading into the mid-June deal expiry.

Rights news drives securities lending demand. The desk has seen demand this week for several names due to their upcoming and current capital raising. Bell Food Group (BELL SW) is currently in its trading period looking to raise CHF 612 million to finance the acquisition of Huegli (HUE SW). Petra Diamonds Ltd (PDL LN) announced details of its pending USD 178 million rights issue. The mining group plans to issue 332.8 million rights at 40p each to accelerate a reduction in its leverage to a more sustainable level. The issue represents a 36% discount to TERP when the news was announced and will trade from the 14th to the 28th June. Finally, news that Phoenix Group (PHNX LN) will begin a GBP 950 million rights issue to fund part of the cash consideration for the acquisition of Standard Life Assurance Limited. The trading period has been set for the 26th June through to the 9th July and represents a 25.1% discount to the TERP.