Ample IPOs should drive bumper revenue in 2021, says Northern Trust
10 February 2021 US
Image: iQoncept/adobe.stock.com
The slew of initial public offerings (IPOs) — especially for remote working sectors — could mean a vintage year for securities lending revenue thanks to pent-up demand caused by COVID-19, says Northern Trust’s Mark Coker.
In a securities lending market review webinar hosted by Northern Trust in January, Coker alongside panellists from various financing desks within the bank, reviewed a tumultuous and unprecedented 2020 before looking ahead to a rosier 2021.
Coker, who serves as head of North American equity securities lending trading, argued that “a lot of the headwinds [of 2020] are behind us” and 2021 will constitute a post-COVID-19 recovery phase in the markets, highlighting the fact that all but one of the short selling bans initiated last year have been removed, with South Korea’s expected to be partially repealed in May.
Looking back, Coker said that although there were very few IPOs in the first half of 2020, as equity markets improved in the second half of the year some IPOs of firms in sectors that thrive in the remote working environment flourished, a trend he expects to continue in 2021.
The combination of a COVID recovery and cheap capital is likely to drive ample corporate events, which present arbitrage opportunities.
“Any of our clients that hold those new listings will benefit from demand over the first six months of the issuances before the lock-up period expires,” he told audience members.
More broadly, he expects borrow demand to improve, driving a wider variety of ‘specials’ and revenue for lenders.
Additionally, Coker believes that the Biden presidency will mean less uncertainty coming from the White House and less pandemic era “knee-jerk volatility” in the markets.
He also predicted more trading on fundamentals and a rise in mergers and acquisitions as corporations attempt to repair balance sheets.
Elsewhere, one dynamic predicted to continue in the US is a shift to non-cash collateral as borrowers are looking to be more efficient with their holdings.
Coker observes that the actions taken in Q2 2020 in response to the pandemic — namely, vast quantities of cash pumped into the system by central banks — was echoed by fellow panellist Brad Pedersen, director of securities lending reinvestment short duration fixed income. Pedersen said the liquidity in the system was “extreme” and that cash will likely not get stuck in corporate treasury accounts and will end up back in the market in some form.
Pedersen also sounded a note of caution on negative interest rates. Asked whether the US will see negative interest rates, as in Japan and Switzerland, Pedersen argued it is a risk but the Federal Reserve has been very clear that from a policy rate perspective “they don’t see that happening”.
It is possible markets could go negative thanks to the sheer amount of cash flow working against the dwindling amount of supply in treasury bills, but Pedersen said the Fed has “levers and dials” that could remedy that potential outcome.
It is too early to tell whether Pedersen's cautious optimism on interest rates will come to bear, but evidence to support Coker’s bullish prediction on lending revenue is already taking form.
January was the most-revenue-generating month for US equity finance on record with lending revenue reaching $453 million, according to IHS Markit.
The record-breaking start to the year, thanks to high-profile “short-squeeze fireworks” centred on GameStop, outdid previous highs of $407 million in December and $416 in June last year, and $410 million in September 2008.
Away from the headline act in the US, European equity lending revenue also had a strong start to 2021, indicating a sustainable improvement on last year’s lacklustre returns is possible.
In a securities lending market review webinar hosted by Northern Trust in January, Coker alongside panellists from various financing desks within the bank, reviewed a tumultuous and unprecedented 2020 before looking ahead to a rosier 2021.
Coker, who serves as head of North American equity securities lending trading, argued that “a lot of the headwinds [of 2020] are behind us” and 2021 will constitute a post-COVID-19 recovery phase in the markets, highlighting the fact that all but one of the short selling bans initiated last year have been removed, with South Korea’s expected to be partially repealed in May.
Looking back, Coker said that although there were very few IPOs in the first half of 2020, as equity markets improved in the second half of the year some IPOs of firms in sectors that thrive in the remote working environment flourished, a trend he expects to continue in 2021.
The combination of a COVID recovery and cheap capital is likely to drive ample corporate events, which present arbitrage opportunities.
“Any of our clients that hold those new listings will benefit from demand over the first six months of the issuances before the lock-up period expires,” he told audience members.
More broadly, he expects borrow demand to improve, driving a wider variety of ‘specials’ and revenue for lenders.
Additionally, Coker believes that the Biden presidency will mean less uncertainty coming from the White House and less pandemic era “knee-jerk volatility” in the markets.
He also predicted more trading on fundamentals and a rise in mergers and acquisitions as corporations attempt to repair balance sheets.
Elsewhere, one dynamic predicted to continue in the US is a shift to non-cash collateral as borrowers are looking to be more efficient with their holdings.
Coker observes that the actions taken in Q2 2020 in response to the pandemic — namely, vast quantities of cash pumped into the system by central banks — was echoed by fellow panellist Brad Pedersen, director of securities lending reinvestment short duration fixed income. Pedersen said the liquidity in the system was “extreme” and that cash will likely not get stuck in corporate treasury accounts and will end up back in the market in some form.
Pedersen also sounded a note of caution on negative interest rates. Asked whether the US will see negative interest rates, as in Japan and Switzerland, Pedersen argued it is a risk but the Federal Reserve has been very clear that from a policy rate perspective “they don’t see that happening”.
It is possible markets could go negative thanks to the sheer amount of cash flow working against the dwindling amount of supply in treasury bills, but Pedersen said the Fed has “levers and dials” that could remedy that potential outcome.
It is too early to tell whether Pedersen's cautious optimism on interest rates will come to bear, but evidence to support Coker’s bullish prediction on lending revenue is already taking form.
January was the most-revenue-generating month for US equity finance on record with lending revenue reaching $453 million, according to IHS Markit.
The record-breaking start to the year, thanks to high-profile “short-squeeze fireworks” centred on GameStop, outdid previous highs of $407 million in December and $416 in June last year, and $410 million in September 2008.
Away from the headline act in the US, European equity lending revenue also had a strong start to 2021, indicating a sustainable improvement on last year’s lacklustre returns is possible.
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