From the desk of Jeroen Bakker,
Benelux Practice Lead, Pierpoint Financial
In the tenth episode of (In)Famous Securities Lending Transactions, I will look back at some of the stocks I wrote about in previous blogs and to look at developments that have occurred after I posted the blog, often finishing with ‘watch this space’ …. so watch this!
With the securities lending data provided by FIS Astec Analytics, I am going to look back at the following stocks:
Wirecard – blog posted on July 14
Nikola – blog posted on September 22
Grenke – blog posted on October 6
Since posting the blog on July 14, many events have occurred, but one thing is for sure, the Wirecard saga was definitely a fraud with many consequences, both political and potentially criminal.
Quick recap: The German digital financial commerce platform listed on the German stock exchange and member of the DAX30 was on the front pages of the news mid-2020, but most observers have been aware of allegations that something was not right for several years. Journalists and analysts had to fight the company, the regulator, law firms and general opinion, but in the end, the truth prevailed, and a $2bn fraud came to light.
EY, BaFin, sell-side analysts, and the German finance minister are just a few of the parties that have been asked to justify their decisions and actions or maybe in better words, the lack of actions. From a criminal perspective, the CEO Markus Braun was arrested shortly after his resignation, COO Jan Marsalek is currently a fugitive from the German police, the most wanted man in Europe, and is most likely residing in Belarus. On a more sombre note: Christian Bauer, the former Asian head of Wirecard was found dead in Manila in August. All in all, food for a documentary which will surely be made.
The SBL graph shows the drop in utilisation when the stock price dropped from around €100,00 to below €2,00 caused by short-sellers closing their positions. At the same time, SBL fees increase exponentially as lenders are looking for an adjustment in revenue. With the share price below €2,00 the daily run rate dropped fifty-fold overnight, lenders that still had positions on the books increased fees to over 100%. Hedge funds that didn’t close their shorts wanting to squeeze out the remaining last few euros of share price drop paid a hefty run rate of close to €2.000 per day for 1.000.000 shares. That equates to two cents a day per share which means that after 25 days the trade is generating a loss.
Some background on what happens from a securities lending perspective when companies go into administration. As soon as a company goes into default, their shares are no longer transferable, which means securities lending transactions can’t be closed. The lender and the borrower need to find an arrangement to close out the trade. This is often a cash settlement; however, how much are the shares worth? As long as the cash settlement is not agreed, the borrower will continue to pay the lender fee and post collateral.
In the previous blog on Wirecard, I ended saying that hedge funds keep shorts on the book to squeeze out the last bit of revenue, well that is definitely the case now. It has actually gone over to the other end, and short-sellers that have not closed out their position will lose out every single day the trade is on.
If you want to learn more about the Wirecard story, listen to our podcast with Fraser Perring, Viceroy Research (formerly part of Zatarra Research which was amongst the earliest to call out Wirecard).
The original blog on Nikola was triggered because of the Hindenberg report (Sept 10) and we posted on September 22, after rumours in the press about falsified reports and manipulated videos. Since then, the Nikola founder had stepped down, and more surprisingly, General Motors ditched their plans to acquire an equity stake in Nikola. GM replaced that with an announcement that the two companies will only retain a fuel cell partnership. The impact on the share price was to be expected, which is almost back to the IPO level (June 4, 2020).
From a securities lending perspective there is a bit of a strange trend going on at the moment however that is difficult to observe in the below graph and I will zoom in on the last four months.
The graph below shows the fees and utilisation levels for Nikola from September 1 until the end of November. The nonstandard situation is that the utilisation levels are increasing and are close to 100% while the SBL fee is dropping and settling around the 5% mark. It would be more intuitive that increased revenue would be followed by increased SBL fees. One additional comment is that new shares are coming into the market as the insider lock-up period has ended. Volumes in the last week are threefold the 30day average trading volume.
There were two scenarios outlined in my previous blog:
Scenario 1 – NKLA price rises in 6 months from $32 to an all-time high of $80 – SBL fees drop to 50 bps with a collateral cost of 50bps per annum:
Scenario 2 – NKLA price drops in 6 months from $32 to $1.00, SBL fees increase to 10% with collateral costs of 50bps per annum:
Obviously, scenario 2 is more realistic at the moment and trending closer to the actual share price direction. Almost three months after posting my original blog there is a paper-profit potential $10,000,000 of the $30,000,000 profit projection, and I expect this number to increase in the next three months.
The Grenke blog was posted a little over two months ago on the back of the Viceroy Research report, which claimed that a substantial part of Grenke’s cash actually didn’t exist. After the initial drop, the share price has stabilised just below the €40.00 mark.
The news cycle has died down a bit as well, sure there are investigations from the BaFin, but that was to be expected after its Wirecard blunder. Grenke has commissioned KMPG to audit their books, but that is also not extraordinary. Viceroy continues to add to their narrative, but nothing seems to have shifted the price further … at least not yet. Two interesting recent developments – first, S&P recently reaffirmed the Grenke AG ratings - BBB+/A-2 and removed it from CreditWatch negative; second, Grenke was dropped from the MDAX index, replaced by Siemens Energy.
From a securities lending perspective, things are calming down as well. After the initial spike in fees, the utilisation levels rose to 80%, however, these are now trending down and are currently at the 60% mark. This is still elevated and reflected in the fees which are hovering around the 15% level, but again trending downwards. In short, maybe this one is too soon to tell for certain. In some cases, allegations of fraud can take time to prove – as seen by the Wirecard saga.
That’s it for my first look back at securities finance ‘Hot’ trades that I have investigated, more reviews will follow as time progresses and the stories evolve further.
In short: one closed case, one in favour of the short sellers and one for which the jury is still out.
As always, I am eager to look at any stock or bond that you thought was interesting in the last year or has triggered your interest in the future. Drop me the name, and I will see if there is a compelling securities finance blog - send it to firstname.lastname@example.org.