US electric vehicle manufacturer Nikola was the most revenue-generating security in Q3, bringing lenders more than three times as much as the second-highest earner.
Securities lending revenue from this controversial asset hit $114 million by the end of the quarter and now sits at $189.8 million for the first three quarters of the year combined.
Short interest in Nikola first took off in February when a special purpose acquisition company (SPAC) announced plans to take it public.
IHS Markit data shows that cost to borrow shot up from single digits to more than 50 percent in late May before exploding into triple digits, peaking at just over 700 percent, in July in the lead up to the date Nikola’s warrants could be converted into the underlying shares.
The extreme borrow cost was the result of holders of the warrants wanting to short the underlying shares as a hedge because the warrants didn’t fully reflect the increase in share price (partly for the reason that when the warrants are exchanged for shares that increases the number of tradable shares, diluting and weighing on share price), explains IHS Markit’s Sam Pierson.
However, an enticing initial public offering (IPO) arbitrage opportunity only tells half the story of how Nikola became the top security to lend last quarter.
Activist short seller Hindenburg Research released a report in September claiming that Nikola was dishonestly presenting the features of its electric vehicles, which initiated a heated back-and-forth between the fund and the manufacturer.
Among Hindenburg’s claims was that a now-infamous promotional video claiming to show a prototype of its commercial lorry 'self-driving' down a road was in fact merely an example of the truck rolling downhill. Nikola first denied and then admitted this was the case, although it continues to dispute other accusations from the report.
The US Securities and Exchange Commission waded in shortly after the report was released and is now investigating Nikola’s credentials and the validity of Hindenburg’s claims.
The episode inspired a resurgence of short interest and borrow fees that peaked at around 30 percent in mid-September in tandem with a further slide in share price, which dropped from highs of around $43 just after the warrants became convertible to less than $20 following the report's release.
Although the current borrow demand pales in comparison to that seen earlier in the year, short interest is expected to see some further uptick as a result of Nikola’s IPO lock-up expiry due for mid-December which will further dilute the supply of shares available.
Revenue runner ups
In comparison to Nikola, the second-highest revenue-generating security, German car battery manufacturer Varta, only earned lenders $34 million in Q3.
Just below that was cruise line operator Carnival, which has been a short target since the industry was effectively shut down by the pandemic earlier this year.
Lenders of Carnival collectively saw returns of $27 million in the previous quarter.
IHS Markit notes that while the $114 million in Q3 revenue for Nikola shares is “impressive" it falls far short of 2019's Q3 revenue leader, Beyond Meat, which brought in $198 million.
Excluding the contribution of the top earner from each year, the rest of the top-10 delivered $187 million in 2020, a 40 percent decline from $311 million in 2019.
