Taking a plunge
06 August 2019
Sam Pierson of IHS Markit discusses increased borrow demand for Aston Martin securities
Image: Shutterstock
The share price of Aston Martin has declined by more than 40 percent since the firm’s 24 July trading update and revised outlook. The firm stated that: “The challenging external environment highlighted in May has worsened, as have macro-economic uncertainties. We anticipate that this softness will continue for the remainder of the year and are planning prudently for 2020.”
Short sellers perceived that the firm could fall short of expectations this year. Following the initial public offering in October 2018, short-sellers borrowed an increasing number of shares until the firm announced its FY 2018 results on 28 February, prompting a 21 percent decline in the share price. The GBP value of Aston Martin Lagonda (AML) shares on loan peaked the day before on 27 February at £235 million. Following the February windfall of profits, short-sellers reduced their position by approximately one million shares and have maintained the position at an average of 16 million shares, or approximately 150 million, since then. At the start of July, short-sellers began to add to the position. Reaching a post-IPO record of 18.2 million shares, or 8 percent of outstanding shares, they continued to add to the short position following the 24 July update; likely eyeing the firm’s upcoming earnings release as a potential downside catalyst.
The firm’s debt has also seen an increase in borrow demand, the total borrow balance reaching £64 million, a 32 percent increase since the start of July. Similar to equity, recent weeks saw an increase in demand, persisting through the outlook update. The trading of credit default swaps (CDS) tied to the firm’s debt is not liquid enough to be priced by our consensus pricing service.
Aston Martin CEO Andy Palmer was quoted in the report as saying, “While retails have grown by 26 percent year-to-date, our wholesale performance is adversely impacted by macro-economic uncertainty and enduring weakness in the UK and European markets.”
Jaguar Land Rover is another UK automaker whose bonds have seen significant borrow demand over the last nine months. Credit shorts built a position coming into 2019 and were temporarily rewarded in early February when the firm announced a significant write-down of assets. That joy was short-lived, as the bonds have rallied from the February low point and have traded in a range since then. In the weeks after the write-down, the face value of JLR bonds on loan reached a peak of £266 million. The spread on the five-year CDS referencing the Jaguar Land Rover (JLR) bonds peaked above 900 basis points in early February, subsequently declining to a year-to-date low of 563 basis points in April, before widening to 678 basis points at present.
The challenging economic outlook for the UK, based on concerns for global growth combined with Brexit uncertainty, is reflected in the challenging position faced by UK automakers. Although the borrow demand for related securities has been elevated, the lendable supply of those securities has kept a lid on borrow costs. The availability of securities has frustrated efforts to generate significant excess returns through lending, however, the elevated balances and “warm” fees for AML made it the eleventh most revenue-generating UK equity in Q2. If the struggling sector can regain its footing, current prices may prove attractive to long investors; they may also take into account the potential need for short sellers to cover. Earlier this year, the JLR bonds were a good example of short-covering helping to fuel a rally in the credits. However, with a remaining borrow balance of £181 million, it would be hard to claim that short-sellers have given up on that trade.
Short sellers perceived that the firm could fall short of expectations this year. Following the initial public offering in October 2018, short-sellers borrowed an increasing number of shares until the firm announced its FY 2018 results on 28 February, prompting a 21 percent decline in the share price. The GBP value of Aston Martin Lagonda (AML) shares on loan peaked the day before on 27 February at £235 million. Following the February windfall of profits, short-sellers reduced their position by approximately one million shares and have maintained the position at an average of 16 million shares, or approximately 150 million, since then. At the start of July, short-sellers began to add to the position. Reaching a post-IPO record of 18.2 million shares, or 8 percent of outstanding shares, they continued to add to the short position following the 24 July update; likely eyeing the firm’s upcoming earnings release as a potential downside catalyst.
The firm’s debt has also seen an increase in borrow demand, the total borrow balance reaching £64 million, a 32 percent increase since the start of July. Similar to equity, recent weeks saw an increase in demand, persisting through the outlook update. The trading of credit default swaps (CDS) tied to the firm’s debt is not liquid enough to be priced by our consensus pricing service.
Aston Martin CEO Andy Palmer was quoted in the report as saying, “While retails have grown by 26 percent year-to-date, our wholesale performance is adversely impacted by macro-economic uncertainty and enduring weakness in the UK and European markets.”
Jaguar Land Rover is another UK automaker whose bonds have seen significant borrow demand over the last nine months. Credit shorts built a position coming into 2019 and were temporarily rewarded in early February when the firm announced a significant write-down of assets. That joy was short-lived, as the bonds have rallied from the February low point and have traded in a range since then. In the weeks after the write-down, the face value of JLR bonds on loan reached a peak of £266 million. The spread on the five-year CDS referencing the Jaguar Land Rover (JLR) bonds peaked above 900 basis points in early February, subsequently declining to a year-to-date low of 563 basis points in April, before widening to 678 basis points at present.
The challenging economic outlook for the UK, based on concerns for global growth combined with Brexit uncertainty, is reflected in the challenging position faced by UK automakers. Although the borrow demand for related securities has been elevated, the lendable supply of those securities has kept a lid on borrow costs. The availability of securities has frustrated efforts to generate significant excess returns through lending, however, the elevated balances and “warm” fees for AML made it the eleventh most revenue-generating UK equity in Q2. If the struggling sector can regain its footing, current prices may prove attractive to long investors; they may also take into account the potential need for short sellers to cover. Earlier this year, the JLR bonds were a good example of short-covering helping to fuel a rally in the credits. However, with a remaining borrow balance of £181 million, it would be hard to claim that short-sellers have given up on that trade.
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