Here’s an interesting fact from Data Explorers, the securities lending data company, regarding short interest in BP-issued securities.
While the amount of BP equity that’s out on loan has contracted to 1.6 per cent of the shares in issue from just below 2 per cent for the UK listing in mid June — having risen to that level from almost nothing — there has been a small surge in the borrowing of BP corporate bonds.
From virtually nothing three weeks ago, people are now borrowing an average of 40 per cent of what they can get their hands on across the range of BP Capital Market bonds in issue, according to Dataexplorers’ Will Duff Gordon.
When it comes to the benchmark 2019 $1bn BP Capital Markets bond, that figure rises to 75 per cent — equal to 24 per cent of the total issue.
This is the bond in question (currently yielding 7.56 per cent):
It’s interesting because it’s rare to see more lending activity in a company’s corporate bond than in its shares, says Duff Gordon.
Usually investors prefer to buy credit default swaps or short the company by borrowing and selling equity.
The current trend might suggest either that there are some liquidity constraints in CDS, or that investors feel it’s easier to profit from future ratings downgrades via the bond market.
There’s also the possibility that borrowing bonds facilitates some form of capital structure arbitrage, which involves taking a view on which of a firm’s listed share classes will underperform others.
The same trend, by the way, has also been noted in the bonds of Anadarko, according to Duff Gordon.
As he observed in a written note on Monday:
Anadarko Petroleum (APC), junior partner in the Horizon well, sees demand to borrow across at least 5 of its corporate bonds. The 2019 is the most expensive to borrow. Oil related companies occupy 5 of the top 10 most in demand USD investment grade bonds if one looks at the % of the issue value on loan.
Related links:
BP Turtle-gate – FT Alphaville
Portrait of an oil company in distress – FT Alphaville
BP – a line in the sand? – FT Alphaville
BP has nothing to fear… – FT Alphaville