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October revenues decline by 19% YoY, increase by 10% MoM
European equity revenue rebound intact, revenues increase 17%
YoY
Lowest October revenue since 2016
ETF revenues increase 48% YoY
Global securities lending returns declined by 19% YoY in
October, however the $717m in revenue did reflect a 10% increase
compared with September. The YoY shortfall was primarily driven by
Americas and Asia equities; The US equity market continues to fall
short of a stellar 2019, however the revenue trend is upward, while
Asia equity returns are still trending down. European equity
revenues remain elevated as the result of hard-to-borrow shares
which started in Q3, however a challenging Q2 still weighs on YTD
returns.
Revenue drivers which emerged toward the end of
September persisted and expanded in October. Those trends
include increasing capital raises both for distressed enterprises
as well as initial public offerings and directional short demand
relating COVID-19 and its global repercusions. While equity lending
revenues have benefitted substantially from corporate actions, and
the event-driven fund managers who trade them, a new trend may have
emerged in October which could set the stage for broader equity
short demand over the last two months of 2020, which we'll discuss
later in this note.
European equity revenue increased 17% YoY for October, following
a strong Q3 result where revenues increased by 10% YoY. The
European upswing continues to be concentrated in Germany and the
Netherlands, with the rest of Europe combining for a 12% YoY
decline in October. German equity lending revenue were bolstered by
hard to borrow shares, with 3 of the top 5 revenue generators in
the region listed there. Varta Ag delivered $16m in October
revenue, the 3rd consecutive month that the German battery maker
was the top revenue generating security globally. German equity
lending revenues totalled $31.6m for October, a 104% YoY increase
and a 4% MoM increase.
Rights issues continue to drive borrow demand for European
equities, with Danish airline SAS AB being the most recent to see
soaring borrow cost for common shares as arbitrageurs pay a steep
price for hedges. Dutch firm Unibail Rodamco Westfield Se was the
2nd most revenue generating European equity for the 2nd consecutive
month, with increasing fees offsetting a decline in shares on loan.
On a related note, Italian firm BPER Banca (BPE) generated just
over $3m in October revenue as the result of a capital raise
required to purchase assets from Intesa Sanpaolo SpA. The increase
in revenue from BPE shares boosted October Italy equity lending
revenues by 21% YoY, the only month of 2020 where revenues
increased compared with 2019.
UK equity lending revenues remain subdued relative to 2019, with
$12.2m in October revenue reflecting a 10% YoY decline. French and
Spanish equity revenues have also lagged YoY, with October revenues
declining 51% and 44%, respectively. YTD European equity lending
revenues total $1.1bn, a decline of 23%, however it's worth noting
that each month starting with July has seen revenue increase
YoY.
Americas equity revenues came in at $281m for October, a 27% YoY
decline. As noted in the September snapshot, the YoY comparison
suffers from a particularly strong return in 2019; October revenues
increased by 25% compared with September with the uptrend from the
August doldrums remaining in place.
US equity revenues came in at $259m, a 21% YoY decline and 30%
MoM increase. The surge in returns one year ago was led by Beyond
Meat (BYND), which generated $59m in October 2019 revenues, however
US equity revenues would have still declined by 4% YoY excluding
the impact of BYND shares. A few examples of 2020 vintage IPOs
generating outstanding returns include BigCommerce Holdings, Inc.
and Lemonade Inc, which generated $6.3m and $6.2m in October
revenue, respectively. With further conventional and SPAC IPOs on
deck, notably including the long-awaited Airbnb listing, it's
likely that US equity returns maintain the current uptrend through
the latter two months of Q4. The two most revenue generating US
equities, INO & SRNE, are both related to the COVID-19 vaccine
and treatment pipelines, a trend of borrow demand likely to persist
for the duration of virus impact. US equity "special" balances,
defined here as loans with fee greater than 500bps, increased from
an average of $8.2bn in September to $9.8bn in October (remaining
well below the $18bn YTD peak observed in June).
Canadian equity lending returns declined sequentially and YoY
for October, as was the case for September. The $22.4m in October
revenue is the lowest for any month YTD. Cannabis related returns
have declined steadily as increased issuance has translated to
additional lendable shares and lower fees, with no representation
from Canadian equities among the monthly top 10 North America
equity revenue generators table for the first time YTD. Canadian
equity specials balances have declined from an average of $2bn in
January down to only $667m in October.
Asia equity lending revenues continue to fall short of 2019,
with October revenues of $116m reflecting a 31% YoY decline, and
the lowest monthly return YTD. The largest market, Japan equities,
delivered $55m in October revenues, a decline of 26% YoY. Hong Kong
equity lending revenues mounted a modest recovery in October, with
$25.5m in revenues reflecting a 9% YoY and a 12% MoM increase. The
short sale ban in South Korea continues to limit lending revenue,
with $9.5m in October revenue being the lowest for any month of
2020.
Global ETP revenues were $33m for October, a 48% YoY increase,
however the YoY comparison is partly owing to a dip in October
2019, with the MoM increase only 7% compared with September.
On-loan balances averaged $64bn, a 9% MoM increase though still
well below the peak monthly average balance of $73bn observed in
March. Global ETP utilization increased slightly MoM in October,
with the growth in loan balances exceeding a 1.3% increase in
lendable asset value. In the September revenue note we pointed out
the increased borrow demand for high-yield credit focused funds;
The demand for HY products subsided in early October before picking
up toward the end of the month in advance of the US election. The
increase in demand for HY products didn't have as significant
impact on total revenues as they did in the Q1 market decline,
however the contribution of fixed income ETPs did increase from 13%
in Q3 to 15% in October.
bond lending revenues have been on a steady decline since the
post-GFC peak in 2018. Central bank support for global credit has
dampened borrow demand while lendable value has increased steadily
since April, however October did see a 3% increase in loan
balances, which pushed utilization slightly higher MoM. Despite the
widening of the HY CDX index over the last three weeks of October,
revenues from USD HY corporate bonds continue to decline.
Government bond lending activity has substantially returned to
pre-COVID levels in terms of spread and reinvestment revenue.
Global government debt lending revenues totalled $113m in October,
a 3% YoY increase. Average spreads for government debt stabilized
in October, the first month since April to have a MoM increase in
average fees. Fee-based revenue for lending US government
securities came in at $39m for October, a 4% YoY increase. Returns
from lending European sovereigns were $39m for September, a 4% YoY
increase.
Conclusion:
The takeaway from the
September snapshot was a remarkable similarity to the limited
returns in
August, albeit with drivers emerging which appeared likely to
boost returns in Q4. October revenues did increase 10% MoM, and
while they fell short of the
2019 comparable, the event-driven demand for hard-to-borrow
shares remains in place.
An emerging driver of borrow demand came in the form of returns
for short sellers in October, with quant factors derived from
securities finance data by IHS Markit
Research Signals bouncing back, following a very challenging
period which started with the April rally. That result was observed
in US, Europe and APAC ex-Japan. Broad positive returns for signals
derived from securities finance and short interest data are a boon
to equity long-short funds, which in turn may support increased
demand for hard-to-borrow shares going forward.
Through the first ten months of 2020 global securities lending
returns of $6.9bn reflect a decline of 11% compared with the first
ten months of 2019, a result almost entirely driven by lower fee
spreads; Global loan balances increased by 2.3% YOY. Revenues have
been highly dependent on corporate actions and will likely remain
so, however the relative decline in the most-shorted equities may
augur well for market liquidity and borrow demand for the remainder
of 2020.
Posted 05 November 2020 by Sam Pierson, Director of Securities Finance, S&P Global Market Intelligence
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