S&P Global: US equites are “hero” of secfinance markets in 2023

The US economy has experienced a very eventful eighteen months. It has undergone everything from banking collapses, AI mania, an unexpected equity market rally, a potential US debt ceiling cliff edge and a predicted, but never materialized recession.

Luckily, for both lenders and borrowers, market conditions have been ripe for securities lending activity, especially in the US. Over the first half of 2023, the lending of US equities generated an impressive $2.6 billion (Q1 $1.3bn, Q2 $1.3bn). This represents an increase YoY of 28% (H1 2022 $2.0bn), according to data from S&P Global Market Intelligence.

The momentum provided by the aforementioned market events cultivated an exceptionally healthy specials market in the US (at S&P Global Market intelligence, the specials market is defined by the lending of a security at a fee greater than 500bps). US equity specials generated $2.8bn in revenues over the course of the first eight months of the year. To put this in context, this represents a 24% increase on 2022. Over the eight-month period, an average of 78% of all monthly revenues were generated by specials, accounting for 3.2% (average) of all balances. For lenders of these assets, as long as any recall risk is effectively managed, this market has been very good at producing exceptionally strong risk adjusted returns.

During the H1 period, all of the top ten highest generating equities (across all regions) were US listed assets. AMC outpaced all of the other names, generating in excess of $450 million alone. AMC generated more than the next four highest revenue generating names combined over the H1 period (Beyond Meat BYND $126.6mn, Lucid Group Inc LCID $116.7mn, Upstart Holdings Inc UPST $93.4mn, Gamestop Corp GME $77.0mn). US equities have dominated the top revenue earning tables for many quarters.

As markets continue to climb in the region and valuations reach levels not seen for many months, it is likely that this will continue going forward. The strength of the stock market coupled with higher valuations has also provided fertile ground for the reemergence of initial public offerings (IPOs) with the largest IPO of 2023 so far taking place in September (ARM Holdings). An increase in corporate activity is already driving volumes in the securities lending markets higher as investors look to source liquidity and exploit any pricing differentials that may be generated from a change in corporate structures. The most recent spin off of Kenvue (KVUE) shares by Johnson and Johnson generated over $100M in revenues for securities lenders. As a result, Kenvue is currently the eighth highest revenue generating loan of the year so far.

With interest rates now expected to stay higher for longer, the government shut down affecting the production and dissemination of economic data, a move to T+1 for equity markets and the introduction of SEC 10C-1 in the near future, equity markets are set to experience a renewed period of volatility in the final months of the year which may well benefit lenders further.

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