From the desk of Jeroen Bakker,
Benelux Consulting Lead, Pierpoint Financial
In the sixth episode on (In)Famous Securities Lending Transactions, we continue our commentary on stocks that are in ’play‘ in the securities finance world. In this episode, I look at recent developments around German leasing company Grenke AG. One of my previous blogs on Wirecard was a clear case of fraud; could Grenke be a similar case?
Grenke AG is a Baden-Baden based manufacturer, founded in 1978 by Wolfgang Grenke, specialising in leasing communication products, active in factoring and with a banking licence. Grenke AG has been listed on the German MDAX since 2000.
In September 2020 Viceroy Research published its report stating: “Grenke’s global expansion through the purchase of dozens of undisclosed related party franchises is a fraudulent scheme perpetrated on a mass scale, designed to either hide fake cash or siphon off millions of euros to undisclosed related parties, or both”. In short, the report is accusing Grenke of widespread fraud, hoarding excessive amounts of cash while frequently tapping capital markets and of anomalies on Grenke’s financial statements. Most damning, Viceroy believes that a substantial part of Grenke’s cash does not exist. Since the report’s publication, representatives of Grenke have exchanged numerous emails with analysts at Viceroy Research to rebut the accusations.
The share price developments of Grenke show a gradual growth up until early March 2020 when the Covid-19 pandemic hit stock market prices in Europe. During the months of April - July the stock rebounded until 14 September when the Viceroy report was published, and the share price almost halved in three days. Furthermore, Grenke’s largest external shareholder reduced its stake from 5.7% to 3.2% shortly thereafter.
Below shows a more detailed graph of the share price of Grenke in the month of September 2020, including the publication date of the report on September 14.
With the securities lending data provided by FIS Astec Analytics, I am going to see if these rumours and accusations have been picked up in the short-selling world. Has there been an impact on the securities lending fees and utilisation?
One of the trends that is clear is that this stock has never been general collateral (GC). In the last two years, and even before 2019, the stock has always been warm to lukewarm with fees ranging between 1% and 5%, with utilisation rarely dropping below 50% and often spending long spells above 70%. If we then focus on the month of September 2020, the picture is as follows:
In order not to disclose too many confidential details the securities lending fee is indexed using September 1 as 100. There was a gradual increase in fee and utilisation from the start of the month but after the publication of the Viceroy report on September 14 the fee increased by close to 30% in just over a week while the utilisation increased to almost 80 before dropping back to below 75% and trending downwards.
So, increasing fee and decreasing utilisation, what does that mean? In recent blogs, we have seen that the utilisation level is a leading indicator for the direction of the securities lending fee. Increased utilisation will be followed by higher fees which can also be seen in the first SBL graph for the months March till June 2020. Similarly, a decrease in utilisation will lead to a reduction in fee, but what caused the decrease in utilisation?
Two possible scenarios:
Profit takers: short sellers closing their shorts and taking the profit after the recent drop in share price. It would mean that investors that are closing out their shorts leave a potential €30.00 share price drop on the table. This leads us to another potential scenario:
Doubters: short sellers that are uncertain about the time frame in which a potential fraud will be uncovered, in combination with the increase in securities lending fee, leads to an investment scenario where you will need deep pockets to ride out the wave. Many of the most famous frauds took years to unravel fully.
I am not going to pass judgement in Grenke AG v Viceroy Research as to who is right. However, Viceroy Research does have a track record of outing wrongdoing and even outright fraud as proven in the Wirecard case. On the other hand, Wolfgang Grenke is a trusted businessman with high-profile board memberships in chambers of commerce and non-profit organisations.
Will the securities lending indicators be the writing on the wall? As mentioned above, there is a potential downward profit opportunity of €30.00 per share; however, a rebound to a pre-Covid price of €100.00 will prove to be a costly short.
Only time will tell, so another one to watch.