Securities finance May revenue
23 June 2020
Securities lending revenue hit $813 million, representing a 14 percent YoY decrease. IHS Markit’s Sam Pierson breaks down the data
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• Revenues for May was down 14 percent year-over-year
• Government debt and ETF utilisations remain elevated
• Convertible issuance supports US equity borrow demand
• Dividend delays and cancellations depress EU revenues
Securities lending revenue totalled $813 million in May, a 14 percent year-on-year (YoY) decline. With the March market shock receding into the rear-view, exchange-traded funds (ETFs), Americas equities, and government bonds delivered YoY revenue increases in May as a result of varying drivers pushing on demand and spreads. In this note, we’ll explore some of those drivers along with some perspective on quarter-to-date (QTD) and year-to-date (YTD) returns.
Americas equity revenues came in at $331 million for May, putting the YTD total at $1.4 billion, an increase of 18 percent YoY. May returns were the most for any month of 2020 so far, as a result of balances bouncing back while spreads widened. With $31.7 million in monthly revenue, Match Group continues to be the most revenue generating equity globally; May returns were supported by increasing shares on loan and share price. Surging borrow demand for American Airlines (AAL) pushed the lending fee for new loans to nearly 80 percent on 11 May, and generally drove the average fee higher over the course of the month, making AAL the second most revenue-generating equity in May.
Convertible bonds have become an increasingly popular funding source for US firms, with over $45 billion raised YTD through 29 May, constituting 31 percent of all equity and equity-related issuance per IHS Markit capital markets analytics. The increase in convertible issuance is driving a corresponding increase in equity borrow demand from arbitrageurs, who short common shares as a hedge based on the proximity of the share price to the conversion price of the convertible bond. Issuers of convertible notes with conversion prices near the common share price at issuance will see a greater initial borrow demand for common shares, as the delta for the convertible’s embedded call option will be higher.
For example, Carnival Corporation issued $1.75 billion of convertible notes with a conversion price only 25 percent above the concurrently offered equity shares on 31 March; borrow demand soared following issuance as the share price increased past the conversion price. The fee for Carnival shares increased in May, making it the 15th-most revenue generating US equity for the month.
Canadian equity lending revenues declined in April, largely driven by lower returns in the Cannabis sector. That trend reversed course in May with Canopy Growth fees increasing sharply in the last two weeks of the month. Aurora Cannabis is another notable firm in the sector whose fee for new loans surpassed 100 percent during the third week of May. Overall Canadian equity lending revenues were $39 million for May, a 20 percent YoY decline. That puts the YTD total at $232 million, a 2 percent YoY decline, with January and February being the best months of the year thus far.
Equity lending in Europe continues to lag, with $138 million in May revenues reflecting a 57 percent YoY decline. Dividend delays and cancellations complicate the YoY comparison, however a clearer picture of total impact likely won’t be known until later this year after all delays run their course. Wirecard Ag continues to be the most revenue generating security in the region, with $8.5 million in May revenue. Overall Europe equity lending revenues are down 39 percent YTD through the end of May.
Asia equity lending revenues remain subdued compared with prior years. May revenues of $124 million reflect a 19 percent YoY decline. The blame for the shortfall continues to be lower fees, with balances in the region increasing by YoY in May. One bright spot was Hong Kong-listed Vitasoy International Holdings, whose share price and borrow fees increase dramatically on 15 May, boosting returns sufficiently to make Vitasoy the second most revenue generating Asia equity in May with $4.4 million.
Global ETF revenues were $32.6 million for May, a 49 percent YoY increase, however the elevated fees for high-yield credit ETFs are a distant memory from March and early April. In May, increasing ETF loan balances mostly offset decreasing average fees. Returns were relatively flat compared with April, however they were down 39 percent compared with March. Asia ETF lending revenues continue to increase, with $3.1 million in May revenue the most for any month YTD.
Corporate bond lending revenues continue to fall short of 2019 comparison, mostly as the result of declining fees, however balances have also declined YoY. Corporate lending returns came in at $35 million for May, a 33 percent decline YoY. The YTD total revenue is $191 million, a 29 percent YoY decline. Central bank support for global credit may be dampening borrow demand at present, but distress hasn’t been vanquished entirely and the demand to borrow credits may yet catch up to the supply, which has increased over recent years.
Fee-based revenue for US government bond lending came in at $83 million for May, a 50 percent YoY increase resulting from wider spreads and larger loan balances. For beneficial owners, returns from lending US sovereign debt in 2020 have been substantially bolstered by reinvestment, with the May total return including reinvestment more than doubling YoY. Returns from lending European sovereigns were $37 million for May, a 6 percent YoY decline as the result of both lower balances and fees. Global government bond fee-based revenues are up 12 percent YTD through the end of May.
Conclusion:
YTD lending revenues total $3.8 billion across all asset classes, reflecting a 9 percent decline compared with the same period in 2019. A single digit decline in fee-based returns belies the internal change, with US treasuries, North American equities and global ETFs seeing large YoY increases in returns while corporate bonds, ex-NA equities and EU sovereign debt have generally lagged.
The short sale bans put in place during the crash have not been renewed, which is supportive of global borrow demand, though it has been a challenging environment for directional short selling since the start of April. Going forward, corporate actions seem likely to be a significant driver for lending returns, with capital markets re-opened and firms seeking to optimise their structures for the new reality.
• Government debt and ETF utilisations remain elevated
• Convertible issuance supports US equity borrow demand
• Dividend delays and cancellations depress EU revenues
Securities lending revenue totalled $813 million in May, a 14 percent year-on-year (YoY) decline. With the March market shock receding into the rear-view, exchange-traded funds (ETFs), Americas equities, and government bonds delivered YoY revenue increases in May as a result of varying drivers pushing on demand and spreads. In this note, we’ll explore some of those drivers along with some perspective on quarter-to-date (QTD) and year-to-date (YTD) returns.
Americas equity revenues came in at $331 million for May, putting the YTD total at $1.4 billion, an increase of 18 percent YoY. May returns were the most for any month of 2020 so far, as a result of balances bouncing back while spreads widened. With $31.7 million in monthly revenue, Match Group continues to be the most revenue generating equity globally; May returns were supported by increasing shares on loan and share price. Surging borrow demand for American Airlines (AAL) pushed the lending fee for new loans to nearly 80 percent on 11 May, and generally drove the average fee higher over the course of the month, making AAL the second most revenue-generating equity in May.
Convertible bonds have become an increasingly popular funding source for US firms, with over $45 billion raised YTD through 29 May, constituting 31 percent of all equity and equity-related issuance per IHS Markit capital markets analytics. The increase in convertible issuance is driving a corresponding increase in equity borrow demand from arbitrageurs, who short common shares as a hedge based on the proximity of the share price to the conversion price of the convertible bond. Issuers of convertible notes with conversion prices near the common share price at issuance will see a greater initial borrow demand for common shares, as the delta for the convertible’s embedded call option will be higher.
For example, Carnival Corporation issued $1.75 billion of convertible notes with a conversion price only 25 percent above the concurrently offered equity shares on 31 March; borrow demand soared following issuance as the share price increased past the conversion price. The fee for Carnival shares increased in May, making it the 15th-most revenue generating US equity for the month.
Canadian equity lending revenues declined in April, largely driven by lower returns in the Cannabis sector. That trend reversed course in May with Canopy Growth fees increasing sharply in the last two weeks of the month. Aurora Cannabis is another notable firm in the sector whose fee for new loans surpassed 100 percent during the third week of May. Overall Canadian equity lending revenues were $39 million for May, a 20 percent YoY decline. That puts the YTD total at $232 million, a 2 percent YoY decline, with January and February being the best months of the year thus far.
Equity lending in Europe continues to lag, with $138 million in May revenues reflecting a 57 percent YoY decline. Dividend delays and cancellations complicate the YoY comparison, however a clearer picture of total impact likely won’t be known until later this year after all delays run their course. Wirecard Ag continues to be the most revenue generating security in the region, with $8.5 million in May revenue. Overall Europe equity lending revenues are down 39 percent YTD through the end of May.
Asia equity lending revenues remain subdued compared with prior years. May revenues of $124 million reflect a 19 percent YoY decline. The blame for the shortfall continues to be lower fees, with balances in the region increasing by YoY in May. One bright spot was Hong Kong-listed Vitasoy International Holdings, whose share price and borrow fees increase dramatically on 15 May, boosting returns sufficiently to make Vitasoy the second most revenue generating Asia equity in May with $4.4 million.
Global ETF revenues were $32.6 million for May, a 49 percent YoY increase, however the elevated fees for high-yield credit ETFs are a distant memory from March and early April. In May, increasing ETF loan balances mostly offset decreasing average fees. Returns were relatively flat compared with April, however they were down 39 percent compared with March. Asia ETF lending revenues continue to increase, with $3.1 million in May revenue the most for any month YTD.
Corporate bond lending revenues continue to fall short of 2019 comparison, mostly as the result of declining fees, however balances have also declined YoY. Corporate lending returns came in at $35 million for May, a 33 percent decline YoY. The YTD total revenue is $191 million, a 29 percent YoY decline. Central bank support for global credit may be dampening borrow demand at present, but distress hasn’t been vanquished entirely and the demand to borrow credits may yet catch up to the supply, which has increased over recent years.
Fee-based revenue for US government bond lending came in at $83 million for May, a 50 percent YoY increase resulting from wider spreads and larger loan balances. For beneficial owners, returns from lending US sovereign debt in 2020 have been substantially bolstered by reinvestment, with the May total return including reinvestment more than doubling YoY. Returns from lending European sovereigns were $37 million for May, a 6 percent YoY decline as the result of both lower balances and fees. Global government bond fee-based revenues are up 12 percent YTD through the end of May.
Conclusion:
YTD lending revenues total $3.8 billion across all asset classes, reflecting a 9 percent decline compared with the same period in 2019. A single digit decline in fee-based returns belies the internal change, with US treasuries, North American equities and global ETFs seeing large YoY increases in returns while corporate bonds, ex-NA equities and EU sovereign debt have generally lagged.
The short sale bans put in place during the crash have not been renewed, which is supportive of global borrow demand, though it has been a challenging environment for directional short selling since the start of April. Going forward, corporate actions seem likely to be a significant driver for lending returns, with capital markets re-opened and firms seeking to optimise their structures for the new reality.
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