In collaboration with Global Pensions, Data Explorers brings you the latest global trends and analysis on securities transactions. John Arnesen reports
Looking at fees charged by agent lenders on behalf of the pension funds and investors they represent to borrowers can unveil valuable information for asset managers looking at the long and short side of the market. British Airways is a case in point.
Lendable supply, it can be argued, represents a good proxy for market sentiment. As lendable inventory rises and falls it is, in effect, providing insight into wider market sentiment. The same could be said for utilisation of lendable assets. The higher the utilisation of lendable inventory, the more negative the sentiment on a particular stock or sector. It is worth remembering that both lendable supply and on loan utilisation are only proxies for market sentiment, but one that we feel is quite compelling.
It does not always follow that high utilisation is accompanied by falling lendable inventories or institutional selling. What happens when both are rising? British Airways provides an interesting example of rising prices and high utilisation. In figure one we read that the demand to borrow increased dramatically in July 2009 and has not abated since. Eighty percent utilisation is an extremely high reading for any stock in our database. Price appreciation also leapt during the same period and while it has been more volatile, it continues to rise. Figure two describes the percentage of shares outstanding on loan to the market capitalisation of the company and we can read it is maintaining a level at around 30%. Again, this is a very high number. So does this mean that a contrarian view of British Airways is taking place? Actually no, the reason for the highly borrowed or shorted nature of the stock is quite technical.
British Airways issued a convertible bond in August 2009 that matures in 2014. The high utilisation of lendable supply is reflecting a hedge against a long position in the convertible bond and as the price volatility of the underlying ordinary shares rises, more shorting of the shares is required to maintain the delta hedge. The causes of the strong price performance can be attributed to a number of factors, the Iberia tie up received swift governmental approval and the fight with the unions may see the latter weakened as a result. What will be of interest to watch is what will happens if utilisation reaches 100% and there is no more stock to borrow? To maintain the hedge in the convertible bond position, there should be an increase in the cost to borrow from its current fee of around 160 basis points. This remains to be seen, but it is one worth keeping an eye on.
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