Opportunities emerge for UK equity lenders
11 June 2019
Sam Pierson of IHS Markit discusses the state of equity lending revenues so far in 2019
Image: Shutterstock
• Average fees for ‘specials’ on the rise
• Increased willingness to pay for hard to borrow shares
• Q2 UK equity VWAF highest since 2017
Year-to-date UK equity lending revenues through May 2019 are 16 percent below the same period of 2018. This lackluster start to 2019 is only slightly better than total EU equity lending revenues, which are down 22 percent year on year. Despite the backdrop of lower revenues, utilisation and return to lendable, there is some cause for optimism on the part of UK equity lenders. Namely, an increase in the average fees for ‘specials’, or stocks with exceptional borrow fees, relative to the first half of 2018.
Filtering UK equities to those with average fee greater than 200 basis points, there has been a notable increase in the average fees, suggesting a greater willingness to pay for the most in-demand shares. One standout is semiconductor firm IQE, whose weighted average fee has been greater than 10 percent since October last year. The increasing fees and loan balances were sufficient to make IQE the most revenue generating UK equity in Q4 2018 and Q1 2019. While fees have trended down on the margin year-to-date, IQE is still the third most expensive to borrow UK equity with more than $100 million in balances.
Metro Bank has the second highest fee for a UK equity with significant loan balances. The lender’s share price has declined more than 50 percent year-to-date amid concerns regarding classification of commercial loans (which resulted in the bank holding lower reserves). Shares on loan have surged as short sellers seek to maintain a position above $100 million while the share price declines. The increased borrowing demand has pushed the utilisation of lendable shares above 90 percent, which has coincided with the increased fees.
The materials industry group contains some of the most revenue generating UK equities. The significant balances in Anglo American made it the second most revenue generating UK equity in Q1, despite having a low average fee. Sirius Minerals is an emerging special in the sector, with hedging activity relating to the firm’s convertible bonds driving a portion of the borrow demand, however the timeline to profitability for the firm’s potash mine may also be attracting directional short bets. The spike in borrow fees in May made Sirius the most revenue generating UK materials stock this quarter to date, pushing past Anglo American. While the fees for new loans of Sirius shares declined over the last two weeks of May, they still have the highest average fee for a UK equity with at least $100 millon in balances.
Other UK equities leading the increase in special balances include Blue Prism Group, Amigo Holdings & Victoria Plc. While the balances are quite low, Purplebricks Group deserves a mention for being the only UK equity whose weighted average fee is greater than 100 percent annualised. The weighted average fee for UK ‘specials’ increased from 600bps to 800bps over the twelve months ending 30 May.
Despite the rally from the Q4 lows, the broader UK equity market is still more than 10 percent below where it started 2018. The lower share values have reduced lendable assets by 6 percent over the first 5 months of 2019 relative to the same period in the prior year. Frustrating the potential for higher utilisation, loan balances have declined by even more (15 percent). The decline in balances has put pressure on lending revenues and returns to lendable, despite the lower lendable base. The increase in fees for specials are helping to establish greater value for lending programmes, despite the overall drop in balances. The higher fees for specials are pushing up on overall fees, with Q2 weighted average fees for all UK equities on pace to exceed 50 basis points for the first time since Q4 2017.
• Increased willingness to pay for hard to borrow shares
• Q2 UK equity VWAF highest since 2017
Year-to-date UK equity lending revenues through May 2019 are 16 percent below the same period of 2018. This lackluster start to 2019 is only slightly better than total EU equity lending revenues, which are down 22 percent year on year. Despite the backdrop of lower revenues, utilisation and return to lendable, there is some cause for optimism on the part of UK equity lenders. Namely, an increase in the average fees for ‘specials’, or stocks with exceptional borrow fees, relative to the first half of 2018.
Filtering UK equities to those with average fee greater than 200 basis points, there has been a notable increase in the average fees, suggesting a greater willingness to pay for the most in-demand shares. One standout is semiconductor firm IQE, whose weighted average fee has been greater than 10 percent since October last year. The increasing fees and loan balances were sufficient to make IQE the most revenue generating UK equity in Q4 2018 and Q1 2019. While fees have trended down on the margin year-to-date, IQE is still the third most expensive to borrow UK equity with more than $100 million in balances.
Metro Bank has the second highest fee for a UK equity with significant loan balances. The lender’s share price has declined more than 50 percent year-to-date amid concerns regarding classification of commercial loans (which resulted in the bank holding lower reserves). Shares on loan have surged as short sellers seek to maintain a position above $100 million while the share price declines. The increased borrowing demand has pushed the utilisation of lendable shares above 90 percent, which has coincided with the increased fees.
The materials industry group contains some of the most revenue generating UK equities. The significant balances in Anglo American made it the second most revenue generating UK equity in Q1, despite having a low average fee. Sirius Minerals is an emerging special in the sector, with hedging activity relating to the firm’s convertible bonds driving a portion of the borrow demand, however the timeline to profitability for the firm’s potash mine may also be attracting directional short bets. The spike in borrow fees in May made Sirius the most revenue generating UK materials stock this quarter to date, pushing past Anglo American. While the fees for new loans of Sirius shares declined over the last two weeks of May, they still have the highest average fee for a UK equity with at least $100 millon in balances.
Other UK equities leading the increase in special balances include Blue Prism Group, Amigo Holdings & Victoria Plc. While the balances are quite low, Purplebricks Group deserves a mention for being the only UK equity whose weighted average fee is greater than 100 percent annualised. The weighted average fee for UK ‘specials’ increased from 600bps to 800bps over the twelve months ending 30 May.
Despite the rally from the Q4 lows, the broader UK equity market is still more than 10 percent below where it started 2018. The lower share values have reduced lendable assets by 6 percent over the first 5 months of 2019 relative to the same period in the prior year. Frustrating the potential for higher utilisation, loan balances have declined by even more (15 percent). The decline in balances has put pressure on lending revenues and returns to lendable, despite the lower lendable base. The increase in fees for specials are helping to establish greater value for lending programmes, despite the overall drop in balances. The higher fees for specials are pushing up on overall fees, with Q2 weighted average fees for all UK equities on pace to exceed 50 basis points for the first time since Q4 2017.
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