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Early indications of borrow demand and fee changes
Mitchells & Butlers Plc open offer example
Equity finance trading requires the provision of timely market
data. Transactions reported to IHS Markit reflect new loans for a
given settlement date. Transactions are published as received
throughout the day, providing real-time insights. In this note
we'll walk through an example of how this dataset is used to flag
changes in borrow demand and fees.
Data highlight: Mitchells & Butlers Plc
On Monday Feb 15 Mitchells & Butlers Plc announced an
intention from management to pursue an
open offer to raise £350m. The offering created an arbitrage
opportunity whereby an investor could purchase shares in order to
participate in the offering and at the same time purchase put
options to effectively lock in the current price for the shares,
including an estimate of the shares they will be allocated at a
discount in the offering. Hedging the put options drives borrow
demand for the common shares. Lending shares to meet the increase
in borrow demand is an attractive proposition for shareholders who
do not participate in the offer.
The IHS Markit Securities Finance dataset published for Feb 15
showed 8.66m shares on loan for MAB. That figure primarily
reflected settlement (S) for trading on Feb 10, which settled on
Feb 12, and was published on S+1, with the weekend between. New
loans were reported throughout the day on Feb 15, totalling 16m
shares for that day, with borrow fees for intraday loans still GC
on a weighted basis.
During the trading session on Feb 16 traders had the benefit of
the Feb 15 settlement data, which showed 13.6m shares on loan, a
57% DoD increase, with the weighted average fee for new loans of
25bps. Throughout the day on the Feb 16, new loans were reported
with fees ranging from 20-50bps. The Feb 16 intraday loan volume
totalled 8.9m shares.
On Feb 17 the number of shares in settled open loans totalled
17.8m shares, a 31% DoD increase. During the Feb 17 trading
session, there were a few of small-size loans reported with 100bps
fee, though there were still some GC and a range between.
The Feb 17 settlement dataset was published on Thursday Feb 18,
showing 29.9m shares on loan, a 68% DoD increase. The weighted
average fee for new loans on Feb 17 was just over 30bps, suggesting
a move above GC was in progress. Utilization of MAB lendable shares
increased from 17% on Feb 12 to 54% for the Feb 17 dataset,
reflecting both the increase in borrow demand and a decrease in
lendable shares.
The number of MAB shares on loan reached 34m on Feb 18, with the
average fee for all open transactions of 34bps. Over the subsequent
week, the number of shares on loan was flat; however, re-rates of
all open loans pushed the weighted average fee to 73bps for Feb 24
settlement, with 60% utilization.
Conclusion:
The growth in total lendable assets has outpaced borrow demand
growth, creating a multi-year downtrend in equity utilization for
lenders. Generating incremental returns from lending high-fee
equities has never been more important, increasing the value of the
most-timely market intelligence. With the increased focus on
generating revenue from high-fee shares, it has also never been
more important for borrowers to push for rate relief when borrow
pressure subsides. Intraday loan transaction analysis is an
important tool for both sides of the trade.
Posted 01 March 2021 by Sam Pierson, Director of Securities Finance, S&P Global Market Intelligence
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