$789m in January securities lending revenue

• Equities 79% of revenue, down from 80% in December
• IPOs special ahead of lockup expiry, PTON & SDC
• Cannabis related equity revenue resilient
• ADR revenue fades with NIO

The new year is off to a strong start for securities lending, certainly better than January 2019, when markets were emerging from the Q4 2018 sell-off. Many of the positive trends for equity lending which gained steam in the third quarter of 2019 remain in effect. Most notably the lending of IPOs around lockup expiries and the lending of Cannabis related equities. Overall revenues declined 2.5% compared with December, however most of the drop-off was the result of not having an event like the Danaher exchange offer.

One driver of the sequential decline in monthly revenues was also a clear benefit to shareholders, in the form of NIO shares trading 200% above the Q4 2019 low price. The number of NIO shares on loan declined 36% in January and revenues fell from $30m in December to $20m in January. Another formerly significant revenue generator, which has seen declining revenue in 2020, is Casino Guichard. Revenues from lending shares of the French grocery chain fell from $4.9m in December to $3.4m in January; The peak for monthly returns was September 2019, when Casino shares delivered more than $20m in revenue.

One upbeat trend from 2019 which has extended into 2020 is the borrow demand for equities with pre-IPO lockups expiring, most notably including Peloton & SmileDirectClub. Shares of Peloton generated $21m in revenue, while SmileDirectClub generated $5.6m, combing to deliver 10% of the January US equity total of $258m. Another January standout was Tanger Factory Outlet (SKT), which generated just over $13m in revenue in the month, as the result of volatility in shares available for borrow relating to index rebalancing.

A demand driver for 2019 which is gaining momentum in 2020 is the Cannabis sector. Equities related to the nascent industry generated 15% of North American equity revenues in January, up from 13% in Q4 2019.

Overall corporate bond revenues remain below the early 2018 peak, however specific opportunities to generate revenues by lending credit instruments continue to emerge. For example, the fee for the Diamond Sports Group Llc 6.625% note maturing in 2027 nearly doubled in January. The increase in fee, combined with over $600m in loan balances, made the Diamond Sports bond the most revenue generating credit in January. Corporate bond lending revenues came in at $42.1m for January, a decline of 0.8% compared with December.

Government bond lending was substantially similar at the outset of 2020 as it was in Q4, which is to say steady, but well below the Q1 2018 peak. A notable trend which started last November is increased borrow demand, at positive spreads, for European government debt. French sovereign loan balances reached €70bn for the first time since Q2 2010. Revenues from lending French sovereigns increased 7.5% in January as compared with December. German and UK sovereigns have also seen increasing borrow demand.

Conclusion:

So far so good for 2020, though an exchange offer certainly wouldn't hurt! Additional accounts added to the platform helped push lendable assets reported to IHS Markit above $25T for the first time at the start of January.

Stay tuned for monthly revenue updates from IHS Markit Securities Finance!

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.