Growth in S&P 500 lendable assets
29 October 2019
Sam Pierson, director at IHS Markit, looks at the total lendable value of S&P 500 companies in recent years
Image: Shutterstock
There has been notable growth in lendable assets in recent years, with the supply generally exceeding borrow demand growth. The outpacing of demand growth has in turn pushed down on utilisation and return to lendable for beneficial owners. We have broken the growth in S&P 500 lendable assets by increases in market value and increases in shares being added to lending programmes.
Total lendable value across S&P 500 firms has grown from $2.3 trillion to $7.5 trillion since the start of 2010. To determine the contribution of share price appreciation relative to shares being added to lending programmes we compare the constituent level change in shares at the current price with the change in price at the initial number of shares (see Figure 1).
We’ll use Microsoft Corporation (MSFT) as an example of the process for decomposing the source of lendable asset growth. At the start of 2010, there were 1.8 billion MSFT shares reported as lendable assets, which increased to 2.1 billion shares at the end of Q3 2019. That 239 million increase in lendable shares represents $33 billion at present, i.e. the contribution to current lendable value from the addition of new shares to lending programmes. Looking at the impact of appreciation, the 1.8 billion shares already in lending programmes at the start of 2010 were worth $56 billion at the time. After the 356 percent appreciation through the end of September, the value of those shares increased by $200 billion, reflecting the contribution to current lendable value from appreciation. Putting the pieces together, the value of MSFT shares in lending programmes has increased by $233 billion since the start of 2010. Moreover, a 86 percent of the increase ($200 billion) came from appreciation while 14 percent of the increase ($33 billion) was the result of shares being added to lending programmes (see Figure 2).
Looking at the constituent level there is a wide distribution of the lendable growth ratio. For example, Verizon only had 31 percent of the increase in lendable value as the result of share price appreciation, with the shares in lending programmes more than doubling while the share price only increased by 82 percent. In contrast, General Electric saw a $13 billion decline in lendable assets since the start of 2010, with a $14.5 billion decline owing to share price decline set against a $1.4 billion increase resulting from shares being added to lending programmes.
Aggregating up to the index level we see total S&P 500 assets increased by $5.3 trillion since the start of 2010, with 75 percent ($4 trillion) coming as the result of appreciation of assets already in lending programmes at the start of 2010, while 25 percent ($1.3 trillion) was the result of shares being added to lending programmes.
There are many drivers of the increase in lendable assets, from lenders who had dropped out in the immediate aftermath of the 2008 financial crisis, to those who had never lent considering the practice for the first time. In the US there has been the suggestion that the ‘40 Act lending disclosures have spurred new interest in lending assets, given the increased visibility of revenues to non-participants. There are also broader applications of the product in risk, collateral and funding for beneficial owners which have also introduced new supply to the market. While the marginal decision to lend has an impact on aggregate supply, the larger force over the last decade has been share price appreciation.
If the drivers of increasing lendable remain in place it is fair to assume there will be further increases in the fee for hard-to-borrow shares. With utilisation and return to lendable assets falling, increasing fees where possible is the available offset for lenders. For the S&P 500, utilisation of lendable assets has decreased by 45 percent since the start of 2010.
Figure 1
Figure 2
Total lendable value across S&P 500 firms has grown from $2.3 trillion to $7.5 trillion since the start of 2010. To determine the contribution of share price appreciation relative to shares being added to lending programmes we compare the constituent level change in shares at the current price with the change in price at the initial number of shares (see Figure 1).
We’ll use Microsoft Corporation (MSFT) as an example of the process for decomposing the source of lendable asset growth. At the start of 2010, there were 1.8 billion MSFT shares reported as lendable assets, which increased to 2.1 billion shares at the end of Q3 2019. That 239 million increase in lendable shares represents $33 billion at present, i.e. the contribution to current lendable value from the addition of new shares to lending programmes. Looking at the impact of appreciation, the 1.8 billion shares already in lending programmes at the start of 2010 were worth $56 billion at the time. After the 356 percent appreciation through the end of September, the value of those shares increased by $200 billion, reflecting the contribution to current lendable value from appreciation. Putting the pieces together, the value of MSFT shares in lending programmes has increased by $233 billion since the start of 2010. Moreover, a 86 percent of the increase ($200 billion) came from appreciation while 14 percent of the increase ($33 billion) was the result of shares being added to lending programmes (see Figure 2).
Looking at the constituent level there is a wide distribution of the lendable growth ratio. For example, Verizon only had 31 percent of the increase in lendable value as the result of share price appreciation, with the shares in lending programmes more than doubling while the share price only increased by 82 percent. In contrast, General Electric saw a $13 billion decline in lendable assets since the start of 2010, with a $14.5 billion decline owing to share price decline set against a $1.4 billion increase resulting from shares being added to lending programmes.
Aggregating up to the index level we see total S&P 500 assets increased by $5.3 trillion since the start of 2010, with 75 percent ($4 trillion) coming as the result of appreciation of assets already in lending programmes at the start of 2010, while 25 percent ($1.3 trillion) was the result of shares being added to lending programmes.
There are many drivers of the increase in lendable assets, from lenders who had dropped out in the immediate aftermath of the 2008 financial crisis, to those who had never lent considering the practice for the first time. In the US there has been the suggestion that the ‘40 Act lending disclosures have spurred new interest in lending assets, given the increased visibility of revenues to non-participants. There are also broader applications of the product in risk, collateral and funding for beneficial owners which have also introduced new supply to the market. While the marginal decision to lend has an impact on aggregate supply, the larger force over the last decade has been share price appreciation.
If the drivers of increasing lendable remain in place it is fair to assume there will be further increases in the fee for hard-to-borrow shares. With utilisation and return to lendable assets falling, increasing fees where possible is the available offset for lenders. For the S&P 500, utilisation of lendable assets has decreased by 45 percent since the start of 2010.
Figure 1
Figure 2
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