From the Securities Lending Trading Desk

We’ve seen increased demand for J.C. Penney Company after shares lost 17% in May. Toshiba Corp announced a higher than expected $6.3 billion stock buyback last week, sending its shares soaring and leaving investors brimming with optimism. In Europe, UK commercial bank CYBG short interest climbs as negotiations with Virgin Money mature. 

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

There has been increased demand for J.C. Penney Company (JCP) after shares lost 17% in May on the heels of a tough first-quarter earnings report and news that the CEO is leaving. The under-performance pushed shares into negative territory for 2018, with the retailer’s stock having now lost over 80% of its value since the middle of 2013. In the May earnings announcement, the company showed flat sales growth that missed management’s targets. In addition, J.C. Penney struggled on the profit side of the business with operating income totalling just $3 million, or roughly 1% of sales. Investors question whether the company can attain modest sales growth in the foreseeable future especially when market share is falling. The increase in short interest, combined with high utilization rates in the market, has pushed fee levels upward.

We saw an uptick in bearish demand for Sunpower as the share price stumbled following several analysts’ downgrades. The solar sector could face global pricing pressure from unfavorable regulatory developments in China, which have broadly sent stock prices downward. Sunpower specifically, is coming off from its worst week since August 2017. One analyst recently indicated that Sunpower could be under pressure if it does not receive an exemption from solar tariffs, and notes that it could face challenges selling its premium product in an oversupplied environment. Short interest rose by 7% in the most recent reporting period and the 15.86 million shares sold short represents an eye-popping 26.6% of Sunpower’s total available float. Sunpower has been a long-term focus among short sellers and the most recent demand has pushed costs to borrow even higher.

Asia Pacific

Toshiba Corp announced a higher than expected $6.3 billion stock buyback last week, sending its shares soaring and leaving investors brimming with optimism. The Japanese conglomerate said it would carry out the buyback by using some of the proceeds of its recent $18 billion sale of its memory chip business to a consortium led by Bain Capital. In recent months, Toshiba has been pressed by some activist investors to share its large windfall through a share buyback rather than embarking on mergers & acquisitions, an idea which had been suggested by the company’s CEO Nobuaki Kurumatani back in April. The much-improved financial situation of Toshiba has been welcomed by investors after its recent struggles with an accounting scandal and large write-downs related to its nuclear business in the United States. We saw muted securities lending demand for Toshiba following the news, which has seen its shares rise by 11% this year.

Shares in Noble Group Ltd fell to a record low in Singapore trading due to delays in getting shareholder agreement to a controversial $3.5 billion debt restructuring deal. Shares have declined 74% so far this year, as the commodity trader battles with multiple lawsuits and ongoing losses. The trader is attempting to secure a debt for equity swap deal which hands control to its creditors. The deal was forecast to be complete by July but has faced delays. We have seen strong long-term lending demand for Noble Group Ltd.

Europe

Missed estimates by Swedish retailers drives borrower demand. Swedish retailers Clas Ohlson (CLASB SS) and Hennes & Mauritz (HMB SS) have been in demand this week due to poor earnings. CLASB SS, who operates in the retail hardware space, reported a fourth quarter loss wider than estimates had predicted, SEK 106 million versus estimated loss of SEK 45.6 million. Following the news Bloomberg reported that three major investors chose to expand their short positions. Markit data supported this by showing short interest as a percentage of shares outstanding had risen from 4% to 8% in the past week. HMB SS the clothes and fashion retailer has also seen demand grow this week, with speculation that the chairman and major owner Stefan Persson is looking to take the firm private. The firm also reported second quarter sales had fallen short of the average analyst predictions resulting in the share price to fall 4.5% adding more demand for the name.

UK commercial bank CYBG short interest climbs as negotiations with Virgin Money mature. CYBG is near an agreement to purchase Virgin Money to create one of Britain’s largest banks. The proposal values Virgin at nearly 1.6 billion pounds. CYBG market utilization levels have moved from 40% to 75% this month as demand firms up ahead of this week’s deadline. Terms have not been finalized, but there will likely be a mix-match cash and stock element, yielding election arbitrage demand for Virgin Money shares.