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Peloton & SmileDirectClub see increased borrow demand and
fees
Lockup expiries subject to revision due to earnings blackout
period
For post-IPO investors an opportunity to generate revenues
For recent IPOs, lockup expiries have increasingly drawn the
attention of short sellers. Along with a dramatic increase in
tradable shares, it is likely that at least some amount will be
sold, pushing down on the share price. These short-term
dislocations can make for profitable short trades.
The expiration of pre-IPO lockups is stated in the prospectus,
however it is subject to change. For example on August 7th, 2019,
Lyft, Inc. announced that its lockup period would end on August
19th, moving up from the expected date of September 24th. This
announcement was made in conjunction with the firm's Q2 earnings
report; the immediate market reaction to the firm's loss of $0.68
per share (adjusted) was positive, with the share price closing up
3% on August 8th.
Lyft's foreshortened lockup period drew an increase in borrow
demand, with the shares on loan increasing from 23m on August 6th
to 26m on August 14th, the most on record in terms of shares and
dollar value. The announcement, and increased borrow demand, caused
the borrow cost to double on the 7th, with the cost of new borrows
peaking at 33% on August 12th. The lockup expiry meant that nearly
90% of the shares outstanding would become freely tradable for the
first time, where previously the free float had only been 11% of
shares outstanding.
After the initial earnings reaction on August 8th the share
price steadily declined until the lockup expiry on August 19th, a
17% drop in total over that time. There was a spike in traded
volume of LYFT shares on August 19th, however the price only
declined 1.5% on that day. Following the lockup expiry the share
price increased to $54 on August 21st, while shares on loan
declined by 7m shares. After the flurry of short covering, the
share price started to decline again, ultimately reaching a
post-IPO low on October 10th. The share price has increased by 27%
from the low, however, has not traded above $50 since August 26th,
2019.
Similarly, the share price of UBER declined 20% in the week
ahead of lockup expiry on November 6th; BYND shares fell by 22% in
the week ahead of expiry on October 29th. Beyond Meat differed in
that the borrow cost was north of 100% annualized fee for new
borrows, at which levels even a short term trade can be
meaningfully impacted by borrow costs. The borrow cost for UBER
also increased ahead of expiry, but never exceeded 20%.
Which brings us to the upcoming lockup expiries in March, with
the two most anticipated being Peloton (PTON) and SmileDirectClub
(SDC). Peloton's currently planned lockup expiry on March 25th will
fall in the blackout period ahead of Q3 earnings, so it may be
moved up when the firm reports earnings on January 5th. As seen
with Lyft, that can pull forward demand from short sellers and lead
to further increase in borrow costs. SmileDirectClub has not yet
announced a date for its Q4 earnings report, however its
anticipated March 10th lockup expiry may also be subject to change
owing to earnings blackout period.
As of February 4th, there were 45m PTON shares on loan, worth
$1.5bn, with an average borrow cost of 35%. For SDC there are 35m
shares on loan, worth $462m, with an average fee just above 40%. In
both cases the borrow cost spiked in January, with new borrows in
PTON briefly exceeding 70% on January 16th, while new borrow fee
for SDC reached 95% on January 22nd. After trending down from the
mid-January peak, fees for new PTON borrows spiked back to 60% on
February 4th in anticipation of the earnings announcement and
possible moving forward of the lockup expiry. When the PTON lockup
expires nearly 85% of the shares outstanding will become freely
tradable for the first time following the IPO.
Conclusion: As will all profit opportunities, there is no reward
without risk. Just ask Tilray shorts, who were surprised to learn,
on January 11th, 2019, that the largest locked up shareholder, who
owned more than 70% of shares, was not planning to sell any when
the lockup expired on January 15th. That sent the share price up
24% on January 14th. The share price did decline by 17% on the Jan
15th lockup expiry, with increased volume, but the price closed
above the January 10th closing price, making for a costly round
trip for short sellers, who had paid fees as high as 800% for
borrows the week prior.
Although IPO lockup expiries often lead to increased share price
volatility, they can also make for enticing entry points for
investors who want exposure to the business without the overhang of
restricted shareholders who may be waiting to sell. Shares of
Beyond Meat, as of February 3rd, were up 29% from their lockup
expiry and shares of Uber were up 39% from their lockup expiry on
November 6th.
A key consideration for long and short investors is the lending
fee or borrow cost associated with their positions, which is
especially true for IPOs with relatively few outstanding shares
being freely tradable. Tracking the supply, demand and borrow cost
ahead of known catalysts allows investors of all stripes to operate
efficiently.
Posted 05 February 2020 by Sam Pierson, Director of Securities Finance, S&P Global Market Intelligence
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