Specials drive US Q3 revenue upswing
01 October 2019
Sam Pierson, director of securities finance at IHS Markit, lifts the lid on how revenue from ‘deep specials’ contributed to equity lending revenue in 2019
Image: Shutterstock
The third quarter of 2019 has seen a surge in the value of shares on loan with annualised fees greater than 50 percent, which we’ll refer to in this note as ‘deep specials’. While a significant portion of the year-over-year (YoY) growth in deep special balances is the result of Beyond Meat (BYND), there is a broader trend toward increased hard to borrow US equities, which has been in place for years prior to the recent spate of initial public offering (IPO).
The total number of US equities with an average fee for open loans greater than 50 percent has increased 10-fold in the past decade. The average annual balances are often dominated by a few firms but the increased breadth reflected in the count of such securities is also worth noting.
While the balances and number of securities have grown, so too have the average fees. The value weighted fee for deep specials averaged 66 percent from 2010 to 2018, with annual averages between 63 percent and 70 percent. In 2018, the average jumped to 82 percent, with 2019 year-to-date (YTD) averaging 84 percent. With growth in balances and fees comes growth in revenue. If 2019 ended with August, it would already be the best on record for deep special revenues, totaling $349 million YTD. That’s 19 percent of the $1.8 billion in total US equity lending revenue YTD through August, which is also the highest ratio since 2011 when deep specials contributed 30 percent.
Beyond Meat is the standout this year, with YTD revenues just over $180 million through August. That’s 53 percent of the total YTD deep special revenue. The other significant contributor over the last year has been Tilray (TLRY), a Canadian pharmaceutical and cannabis company, which has delivered 17 percent of US deep special lending revenue since the firm’s IPO in July 2018. Excluding BYND and TLRY, balances would be relatively flat in $320 million area between 2016, 2018 and 2019. SNAP, AAOI and GPRO contributed to the standout balances in 2017.
This table shows the YTD highlights from US equity deep specials, only looking at stocks where the average fee was greater than 50 percent for at least 10 days. LYFT, which only had a fee greater than 50 percent on the first settlement date following the IPO, nonetheless deserves a mention in this conversation. While LYFT was not in the ‘deep special’ category for very long, it has contributed just over $50 million to YTD revenues, as the result of 10.5 percent average fee on an average balance of $1.2 billion. The good times for lenders of LYFT shares appear to be over with the early release of shareholder lockups taking the pressure off the borrow. Other names which had shorter durations around events include LLY, ELAN and COTY.
Beyond Meat has certainly been the outstanding contributor of 2019, however the long-running trend of increasing balances and fees for deep specials would be intact without it. As mentioned at the opening, deep specials contributed 19 percent of YTD revenues. The previous instances where deep specials were a significant portion of overall revenues were in 2009, which was entirely the result of the Citi recapitalisation trade, and in 2011, where MNKD, GNK, EDMC and TZOO led a broad group of deep specials.
Looking at another measure of revenue concentration, the top-10 US equities by overall revenue, so including LYFT and LLY, have delivered 39 percent of US equity revenues YTD.
The peak for US equity lending revenue over the past decade was 2016 with $3.1 billion, aided by special fees for Tesla and the surge in demand during the energy credit related sell-off in Q1. Global securities lending revenues reached a new all-time high in 2018, however, US equity lending revenues were down 16 percent from the 2016 peak.
The growth in revenues from lending specials has been impressive in recent months, but overall US equity revenues are down 5 percent YoY through August, though Q3 is on pace to be the first quarter of the year to better its 2018 comparable. That means deep specials have helped to offset an overall revenue shortfall in nominal terms. Taking the decline in overall revenue together with a 3 percent increase in US equity lendable YoY reveals a portrait of frustration for lenders of US equities. Despite the growth in US specials, there is an overall decline in revenue, which combines with an increase in lendable to put pressure on returns to lendable assets as well. While those factors present challenges for lenders of US equities, the increase in demand for specials in Q3 is cause for optimism heading into Q4.
The total number of US equities with an average fee for open loans greater than 50 percent has increased 10-fold in the past decade. The average annual balances are often dominated by a few firms but the increased breadth reflected in the count of such securities is also worth noting.
While the balances and number of securities have grown, so too have the average fees. The value weighted fee for deep specials averaged 66 percent from 2010 to 2018, with annual averages between 63 percent and 70 percent. In 2018, the average jumped to 82 percent, with 2019 year-to-date (YTD) averaging 84 percent. With growth in balances and fees comes growth in revenue. If 2019 ended with August, it would already be the best on record for deep special revenues, totaling $349 million YTD. That’s 19 percent of the $1.8 billion in total US equity lending revenue YTD through August, which is also the highest ratio since 2011 when deep specials contributed 30 percent.
Beyond Meat is the standout this year, with YTD revenues just over $180 million through August. That’s 53 percent of the total YTD deep special revenue. The other significant contributor over the last year has been Tilray (TLRY), a Canadian pharmaceutical and cannabis company, which has delivered 17 percent of US deep special lending revenue since the firm’s IPO in July 2018. Excluding BYND and TLRY, balances would be relatively flat in $320 million area between 2016, 2018 and 2019. SNAP, AAOI and GPRO contributed to the standout balances in 2017.
This table shows the YTD highlights from US equity deep specials, only looking at stocks where the average fee was greater than 50 percent for at least 10 days. LYFT, which only had a fee greater than 50 percent on the first settlement date following the IPO, nonetheless deserves a mention in this conversation. While LYFT was not in the ‘deep special’ category for very long, it has contributed just over $50 million to YTD revenues, as the result of 10.5 percent average fee on an average balance of $1.2 billion. The good times for lenders of LYFT shares appear to be over with the early release of shareholder lockups taking the pressure off the borrow. Other names which had shorter durations around events include LLY, ELAN and COTY.
Beyond Meat has certainly been the outstanding contributor of 2019, however the long-running trend of increasing balances and fees for deep specials would be intact without it. As mentioned at the opening, deep specials contributed 19 percent of YTD revenues. The previous instances where deep specials were a significant portion of overall revenues were in 2009, which was entirely the result of the Citi recapitalisation trade, and in 2011, where MNKD, GNK, EDMC and TZOO led a broad group of deep specials.
Looking at another measure of revenue concentration, the top-10 US equities by overall revenue, so including LYFT and LLY, have delivered 39 percent of US equity revenues YTD.
The peak for US equity lending revenue over the past decade was 2016 with $3.1 billion, aided by special fees for Tesla and the surge in demand during the energy credit related sell-off in Q1. Global securities lending revenues reached a new all-time high in 2018, however, US equity lending revenues were down 16 percent from the 2016 peak.
The growth in revenues from lending specials has been impressive in recent months, but overall US equity revenues are down 5 percent YoY through August, though Q3 is on pace to be the first quarter of the year to better its 2018 comparable. That means deep specials have helped to offset an overall revenue shortfall in nominal terms. Taking the decline in overall revenue together with a 3 percent increase in US equity lendable YoY reveals a portrait of frustration for lenders of US equities. Despite the growth in US specials, there is an overall decline in revenue, which combines with an increase in lendable to put pressure on returns to lendable assets as well. While those factors present challenges for lenders of US equities, the increase in demand for specials in Q3 is cause for optimism heading into Q4.
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