Keeping it Canada
15 May 2018
Samuel Pierson of IHS Markit breaks down data for Canadian securities
Image: Shutterstock
Borrow demand for Canadian securities
The borrow demand for Canadian securities in 2018 is set to exceed last year’s balances of $150 billion across equity and credit. That projection is based on assuming the Q1 2018 balances along with the Q2 to Q4 balances from last year, to counter any seasonality impacts. The security mix has changed greatly over the last four years. However, with collateral needs pushing up demand for government bonds, the average balances for Q1 provincial bonds were up 53 percent as compared with Q1 2015, with Canada bonds not far behind, up 42 percent in that time. The demand for high quality collateral is likely to persist and if anything, the increased balances suggest the demand trajectory is increasing.
As we’ll note in the equity special section, demand from specials has increased in recent quarters, so taken together with the increasing demand for credit instruments, there has been solid demand for Canadian securities at the outset of this year.
Equity demand down slightly
Equity demand is projected to be down this year, with Q1 balances down nearly 9 percent compared with Q1 2017. Equity lending revenues were actually higher, as the result of increased specials demand, so the average fee is increasing while the balances continue to trend down, albeit at a much slower rate than in 2015 to 2016.
The demand for TSX MidCap stocks has been consistent near $15 billion, with mainly large cap stocks making up the decline. Canada listed exchange-traded fund (ETF) balances have also declined, from over $1 billion in 2015 to an average balance of $775 million in Q1 2018, which is largely the result of declining demand for energy sector related indices.
Increasing short demand for equity specials
Canadian equity specials balances have been trending up, with the Q1 2018 representing a 12 percent increase as compared with Q4 last year, which was itself a 5 percent improvement on Q3. The uptrend in specials demand is most welcome, given that average balances for 2017 were down 13 percent as compared with 2016. The rise in oil prices caused significant covering in the related equities in later 2016 and early last year, to the detriment of specials demand, which was 25 percent lower in Q3 last year than it was in Q3 2016.
During Q1 2018, there were some pockets of increasing demand in the energy sector, with Transcanada seeing the largest increase in demand from short sellers, with balances increasing by over $500 million. There was also increasing demand for Cenovus Energy, which saw balances increase by $100 million. Those increases helped drive a small net increase in demand for Canadian Energy stocks in Q1, however both were easy to borrow, limiting the impact on revenues. Of the 15 Energy stocks with the largest increases in Q1 balances, only two had special fees and they were ranked at 14 and 15 (Baytex Energy Corp and Calfrac Well Services, respectively).
While energy specials demand remains well below the 2016 levels, there have been green shoots elsewhere, which augur well for Canadian equity specials demand. One notable group are the marijuana related stocks, which have seen balances increase from less than $1 million at the start of 2016 to over $1.2 billion at the peak in late January this year. Balances have since declined with the market caps in the sector, currently just under $1 billion. Short sellers were drawn to the group following the bitcoin-like rise in valuations in late last year and January this year.
Of the thirteen Canadian marijuana related stocks with over $200 million in market cap, the top three represent 91 percent of the roughly $900 million in borrow balances. Those three stocks are Canopy Growth, Aurora Cannabis and Medreleaf. It’s notable that those stocks only make up 62 percent of the total market cap of the group. The relative concentration of short demand in the higher market cap stocks highlights the constraint put on short sellers by availability of borrow and trading liquidity.
The chart of short balances compared with total market cap shows that short sellers increased bets against the space significantly starting in Q4 and running into the peak valuation for the stocks in the group. The short borrow balances increased both as the result of increasing valuations and an increasing number of shares. Since the peak demand on 19 January, the dollar balances have declined with the shares prices, minus 27 percent. However, short sellers have pressed against the decline increasing share demand by 13 percent in that time.
All of the so-called ‘pot stocks’ still have special borrow fees, but the rates have started to trend down, particularly for the more liquid stocks. That has motivated further concentration in the largest three stocks, which increased from 86 percent of balances at the start of March, up to 91 percent currently.
The downtrend in fees suggests that revenues will continue to slow down after a blistering Q1 pace, where they delivered over 30 percent of all Canadian equity lending revenue. Also putting up a similar signal is the HMMJ ETF, which tracks the sector and whose short demand peaked in mid-January and has declined 90 percent since then. With that said, the concentration in demand in the three largest stocks, and away from the ETF, may also reflect a specific demand for those three stocks, whose average return is minus 30 percent year-to-date through April, compared with minus 7 percent for the other 10 stocks.
Apart from the marijuana stocks there were also some event driven special balances, such as Brookfield Property Partners, whose planned acquisition of US mall operator GGP has driven over $80 million in increased demand for shares since the end of March. Long running popular shorts, Home Capital Group and Badger Daylighting have continued to trade special, though the balances have both trended down over the last couple years.
Taken together the increased demand for specials has helped push against the tide of overall decreasing equity balances, with specials making up 80 percent of Q1 revenue in 2018, as compared with 75 percent of revenue in Q1 2017.
Corporate bond demand increasing
Demand for Canadian corporate bonds has also been increasing, albeit more slowly than the government bonds and from a lower base. The demand for Canadian dollar denominated corporate bonds has been primarily driven by investment grade bonds, which now make up 87 percent of balances, up from 84 percent in 2015.
Balances by collateral type
The increasing demand for Canadian securities is certainly a boon to all holders, but it’s worth noting that Canadian domiciled holders are increasing market share of total loan balances. This chart shows the percentage of loan balances across all Canadian securities, which are on loan, broken out by the domicile of the beneficial owner.
The increasing share of demand going to Canadian domicile holders is also part of a larger trend toward non-cash collateral, with the cash portion of all Canadian securities loans moving down to 14 percent as of the end of April this year, having been 18 percent at the same point last year. This has worked to the benefit of Canadian beneficial owners, given their historical usage of non-cash collateral, as compared with many US holders who are constrained by collateral flexibility. With demand for Canadian securities increasing, and a greater portion of the demand facing Canadian counterparts, this year is off to a good start for Canadian beneficial owners.
The borrow demand for Canadian securities in 2018 is set to exceed last year’s balances of $150 billion across equity and credit. That projection is based on assuming the Q1 2018 balances along with the Q2 to Q4 balances from last year, to counter any seasonality impacts. The security mix has changed greatly over the last four years. However, with collateral needs pushing up demand for government bonds, the average balances for Q1 provincial bonds were up 53 percent as compared with Q1 2015, with Canada bonds not far behind, up 42 percent in that time. The demand for high quality collateral is likely to persist and if anything, the increased balances suggest the demand trajectory is increasing.
As we’ll note in the equity special section, demand from specials has increased in recent quarters, so taken together with the increasing demand for credit instruments, there has been solid demand for Canadian securities at the outset of this year.
Equity demand down slightly
Equity demand is projected to be down this year, with Q1 balances down nearly 9 percent compared with Q1 2017. Equity lending revenues were actually higher, as the result of increased specials demand, so the average fee is increasing while the balances continue to trend down, albeit at a much slower rate than in 2015 to 2016.
The demand for TSX MidCap stocks has been consistent near $15 billion, with mainly large cap stocks making up the decline. Canada listed exchange-traded fund (ETF) balances have also declined, from over $1 billion in 2015 to an average balance of $775 million in Q1 2018, which is largely the result of declining demand for energy sector related indices.
Increasing short demand for equity specials
Canadian equity specials balances have been trending up, with the Q1 2018 representing a 12 percent increase as compared with Q4 last year, which was itself a 5 percent improvement on Q3. The uptrend in specials demand is most welcome, given that average balances for 2017 were down 13 percent as compared with 2016. The rise in oil prices caused significant covering in the related equities in later 2016 and early last year, to the detriment of specials demand, which was 25 percent lower in Q3 last year than it was in Q3 2016.
During Q1 2018, there were some pockets of increasing demand in the energy sector, with Transcanada seeing the largest increase in demand from short sellers, with balances increasing by over $500 million. There was also increasing demand for Cenovus Energy, which saw balances increase by $100 million. Those increases helped drive a small net increase in demand for Canadian Energy stocks in Q1, however both were easy to borrow, limiting the impact on revenues. Of the 15 Energy stocks with the largest increases in Q1 balances, only two had special fees and they were ranked at 14 and 15 (Baytex Energy Corp and Calfrac Well Services, respectively).
While energy specials demand remains well below the 2016 levels, there have been green shoots elsewhere, which augur well for Canadian equity specials demand. One notable group are the marijuana related stocks, which have seen balances increase from less than $1 million at the start of 2016 to over $1.2 billion at the peak in late January this year. Balances have since declined with the market caps in the sector, currently just under $1 billion. Short sellers were drawn to the group following the bitcoin-like rise in valuations in late last year and January this year.
Of the thirteen Canadian marijuana related stocks with over $200 million in market cap, the top three represent 91 percent of the roughly $900 million in borrow balances. Those three stocks are Canopy Growth, Aurora Cannabis and Medreleaf. It’s notable that those stocks only make up 62 percent of the total market cap of the group. The relative concentration of short demand in the higher market cap stocks highlights the constraint put on short sellers by availability of borrow and trading liquidity.
The chart of short balances compared with total market cap shows that short sellers increased bets against the space significantly starting in Q4 and running into the peak valuation for the stocks in the group. The short borrow balances increased both as the result of increasing valuations and an increasing number of shares. Since the peak demand on 19 January, the dollar balances have declined with the shares prices, minus 27 percent. However, short sellers have pressed against the decline increasing share demand by 13 percent in that time.
All of the so-called ‘pot stocks’ still have special borrow fees, but the rates have started to trend down, particularly for the more liquid stocks. That has motivated further concentration in the largest three stocks, which increased from 86 percent of balances at the start of March, up to 91 percent currently.
The downtrend in fees suggests that revenues will continue to slow down after a blistering Q1 pace, where they delivered over 30 percent of all Canadian equity lending revenue. Also putting up a similar signal is the HMMJ ETF, which tracks the sector and whose short demand peaked in mid-January and has declined 90 percent since then. With that said, the concentration in demand in the three largest stocks, and away from the ETF, may also reflect a specific demand for those three stocks, whose average return is minus 30 percent year-to-date through April, compared with minus 7 percent for the other 10 stocks.
Apart from the marijuana stocks there were also some event driven special balances, such as Brookfield Property Partners, whose planned acquisition of US mall operator GGP has driven over $80 million in increased demand for shares since the end of March. Long running popular shorts, Home Capital Group and Badger Daylighting have continued to trade special, though the balances have both trended down over the last couple years.
Taken together the increased demand for specials has helped push against the tide of overall decreasing equity balances, with specials making up 80 percent of Q1 revenue in 2018, as compared with 75 percent of revenue in Q1 2017.
Corporate bond demand increasing
Demand for Canadian corporate bonds has also been increasing, albeit more slowly than the government bonds and from a lower base. The demand for Canadian dollar denominated corporate bonds has been primarily driven by investment grade bonds, which now make up 87 percent of balances, up from 84 percent in 2015.
Balances by collateral type
The increasing demand for Canadian securities is certainly a boon to all holders, but it’s worth noting that Canadian domiciled holders are increasing market share of total loan balances. This chart shows the percentage of loan balances across all Canadian securities, which are on loan, broken out by the domicile of the beneficial owner.
The increasing share of demand going to Canadian domicile holders is also part of a larger trend toward non-cash collateral, with the cash portion of all Canadian securities loans moving down to 14 percent as of the end of April this year, having been 18 percent at the same point last year. This has worked to the benefit of Canadian beneficial owners, given their historical usage of non-cash collateral, as compared with many US holders who are constrained by collateral flexibility. With demand for Canadian securities increasing, and a greater portion of the demand facing Canadian counterparts, this year is off to a good start for Canadian beneficial owners.
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