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Global securities finance returns totalled $4.57bn over the 2nd
half of 2020 (H2), a 10% YoY decline. The utilization of lendable
assets declined substantially from the March 2020 peak as market
valuations recovered. Increasing demand for US and EMEA equity
specials, US Treasuries and global ETFs drove revenue growth for
those asset classes. The YoY revenue shortfall was caused by lower
average fees, while loan balances grew YoY for most asset classes
and regions. Returns varied substantially over the course of H2,
with Q3 revenues declining 16% YoY, while Q4 revenues only declined
by 3% YoY. Combined with H1 returns of $4.77bn, which
reflected a 4.8% YoY decline, FY 2020 global revenues totalled
$9.3bn, a 7% YoY decline.
US equity revenues came in at $1.7bn for H2 2020, a 0.3% YoY
decline. The YoY shortfall was driven by the slow-down in activity
during late summer, with returns thereafter moving shortly higher
through Q4. The core demand driver for the late-2020 upswing was
around traditional and SPAC IPOs. The 2019 traditional IPO class
generated $540m in 2019, with Beyond Meat contributing just over
$300m; During 2020 the 2019 IPO class delivered $208m, with the
most concentrated contributors being Peloton Interactive Inc and
SmileDirectClub Inc, which combined to earn $113m of the total. The
2020 IPO class delivered $146m, with the majority coming in H2.
Insurance firm Lemonade Inc was the most revenue generating 2020
traditional IPO, delivering $42m in 2020 return, 29% of the
total.
FY 2020 EMEA equity finance revenues fell well short of 2019
returns, with FY 2020 revenues declining 16% YoY; however, the
shortfall was entirely concentrated in H1 (-35% YoY), with H2
revenues of $704m reflecting a 16% YoY increase. The upswing was
led by hard to borrow shares like Varta Ag, which saw borrow fees
trend higher over the latter half of the year, and corporate action
related borrow demand from tradable rights and convertible bond
issuance. 2020 is the first year on record where EMEA H2 revenues
exceeded H1. Average EMEA special balances, those with an average
fee greater than 500bps, averaged $5.4bn in H2, a 14% increase
compared with H1.
APAC equity finance H2 2020 revenues of $707m reflect a 27% YoY
decline. Average special balances decreased 26% in H2 as compared
with H1. The shortfall over the latter half of 2020 was driven both
by the short sale ban in South Korea and a lack of high-fee lending
opportunities in Japan. Despite a lack of specials, H2 APAC equity
on-loan balances increased by 0.7% YoY. Lendable balance growth
outpaced the marginal growth in loan balances, leading to a 10% YoY
decline in H2 utilization.
Global ETF revenues were $199m for H2, a 40% YoY increase,
almost exactly matching the H1 return, though return drivers
evolved over the course of the year. Both equity and fixed income
exchange traded products saw surging revenues during the Q1
sell-off. Equity revenues maintained a higher plateau relative to
the start of 2020, after declining from the March peak, as did
fixed income albeit by a much smaller margin.
Fee-based revenue for government bond lending came in at $696m
for H2, a 5% YoY increase, resulting primarily from larger loan
balances. For beneficial owners, returns from lending US Treasury
securities in 2020 were substantially bolstered by reinvestment of
cash collateral in H1, the impact of which faded in early H2.
Looking purely at fee spread income, UST revenues declined by 15%
for H2 compared with H1, while EUR sovereign issue revenues
increased by 3% for H2 as compared with H1.
The supply of corporate bond lendable assets has substantially
outpaced borrow demand growth, leading to relatively few issues
with any friction between supply and demand. Corporate lending
revenues of $200m in H2 reflect a 29% YoY decline and the lowest H2
return since 2010.
Conclusion:
The first half of 2020 was characterized by the COVID-related
market decline in February and March, which resulted in increased
lending returns for some asset classes. Returns for reinvestment
portfolios resulted from the Fed rate cut, while increased equity
utilization resulted from deleveraging on dealer balance sheets
while the surge in Q2 special balances was a result of event driven
strategies such as warrant and convertible arbitrage. The return
drivers from H1 were still having an impact at the outset of H2,
but quickly faded in July, with August reaching a near stand-still
for lending activity. From there, capital markets activity in the
US took off with conventional and SPAC IPO issuance. With interest
rates rising, borrow demand for US Treasury securities increased as
well. EMEA specials balances posted substantial YoY gains. APAC
equity revenues, still subdued in part by the South Korea short
sale ban, posted incremental specials balance growth in Q4. The
year ended on a high note, with December generating the second
most revenue for any month of 2020.
Looking ahead, the IPO market in the US is likely to generate a
lineup of borrow demand events ahead lockup expiries throughout
2021, which will only be bolstered by the surge in SPAC deals. In
Europe, the expected reinstatement of dividends in 2021 will likely
boost lending returns. In addition, arbitrage trades driven by
capital raising, such as rights issues and convertible bonds, may
continue to drive EMEA specials balances. In APAC, the conclusion
of short sale bans may be a tailwind for 2021, while some markets
such as Hong Kong SAR are currently seeing increased borrow demand.
At the end of tumultuous year there is cause for optimism heading
into 2021!
FY 2020 Snapshot:
Global securities finance revenue $9.3bn for 2020, a 7% YoY
decline. The primary growth drivers for equities were increased
borrow demand during the Q1 market decline followed by borrow
demand tied to capital raising during the recovery. Peak monthly
revenue for 2020 was observed in
June, when a trio of US equities delivered outstanding lending
returns on the back of corporate action related arbitrage
opportunities. Lendable assets reached a new all-time in December,
nearly $30T, adding to the challenge of increasing utilization
going forward, though a similar statement could have been made at
lower levels entering 2020 before the surge in utilization during
the Q1 decline.
Posted 12 February 2021 by Sam Pierson, Director, Securities Finance
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