From the Securities Lending Trading Desk

We’ve seen additional short interest for cannabis stocks in Canada after the Senate approved a bill to legalize recreational marijuana, sending shares higher. The Australian arm of Domino Pizza Enterprises saw multiple broker downgrades last week amid an increasingly negative business outlook for the company. M&A activity is a key driver this week for securities lending in Europe.

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

We’ve seen additional short interest for cannabis stocks in Canada after the Senate approved a bill to legalize recreational marijuana starting October 17th, sending shares higher. The demand was centered around Canopy Growth, Aurora Cannabis, and Aphria Inc. Pot stocks in Canada have been a long-term focus of directional demand driven by the companies’ high valuations and, at some point it is believed that production capacity will catch up with demand resulting in a supply glut. There has also has been quite of bit of consolidation in the industry driving up demand. Aurora is in the process of acquiring MedReleaf for $2.2 billion in an all stock deal after recently completing a takeover of competitor CanniMed Therapeutics this past May. As bearish investors look to build up additional short exposure in an already crowded space, borrowing costs have likewise increased.

We saw increased demand for Baytex Energy after they agreed to merge with rival Raging River Exploration for $1.6 billion in an all-stock deal. Under the terms of the agreement, Raging River shareholders will get 1.36 shares of Baytex stock for every share of Raging River they own which equates to about 315 million shares to be issued by Baytex. Investors responded negatively to the deal sending the share price tumbling as the deal threatens to dilute its per-share earnings. One analyst noted that the all-stock transaction waters down its 2019 cash flow per share by 19 percent. Fees-to-borrow spiked as a result of the higher demand. The deal is expected to close in August

Asia Pacific

Short interest for Fullshare Holdings has surged in recent weeks after a prominent hedge fund deemed it to be significantly overvalued. London-based hedge fund Marshall Wace LLP announced last week that they have taken a short interest in the Chinese conglomerate and are becoming increasingly bearish on the company’s prospects. The fund argued that Fullshare’s net income from its investment in Hong Kong-listed firm Zall Group has been repeatedly inflated, and also expressed scepticism on the gains that it has received from its own subsidiary, China High Speed Transmission Equipment Group, which it acquired in 2016. Bearish bets on Fullshare have been on the rise since last year when two short seller reports issued by Glaucus Research and GeoInvesting questioned Fullshare’s trading patterns, accounting and its controlling shareholder’s bank loans. We have seen an increase in securities lending demand in Fullshare since Marshall Wace announced their short positions in the company.

The Australian arm of the world’s largest pizza chain by sales saw multiple broker downgrades last week amid an increasingly negative business outlook for the company. Analysts have become increasingly pessimistic on Domino Pizza Enterprises’ prospects in Australia, where it receives more than half of its earnings, due to a lack of organic market growth and rising labor costs. Additionally, the Australian government’s inquiry into the franchise industry’s practices and an increase in competition will continue to place further margin pressure for the pizza operator. We witnessed an increase in securities lending demand for Domino’s Pizza post the downgrades which saw its shares fall sharply by nearly 10% in a single day’s trading last week.

Europe

A volatile week for British companies, Glencore and Sophos. Glencore (GLEN LN) dropped 15%, only to partially recover following an announcement of a $1B share buyback program to signal to investors’ confidence following a US probe into corruption and money laundering. The first stage of the buyback will begin immediately, running until August 7th with £350M in paid shares. We continue to monitor for news of the US corruption probe. Sophos (SOPH LN), fell up to 30% after a statement of ‘disappointing’ billings growth in Q1 and the outlook for meeting 2020 targets now in doubt.

M&A activity is a key driver this week for securities lending. Mekonomen says it has entered into an agreement to acquire automotive spare-parts distributors FTZ in Denmark and Inter-Team in Poland from Hella for a purchase price of EU395m on a cash and debt-free basis. Part of the purchase price is intended to be financed by a rights issue of SEK1.65bn to be carried out in the second half of the year. Kongsberg Gruppen ASA agreed to buy a marine business from Rolls-Royce Holdings Plc for 500 million pounds ($660 million), as the Norwegian aerospace company expands into technology for shipping. The acquisition will be partly financed by a rights issue of 5 billion kroner ($620 million). Elsewhere, Hurricane Energy (HUR LN) saw increased interest as speculation of renewed takeover interest emerged (Equinor was in talks last year to buy Hurricane but talks fell through) and Ontex (ONTEX BB) trading was suspended after it confirmed that it received and rejected an unsolicited proposal from PAI Partners relating to cash offer for all outstanding shares in the company.