Institutional Investors Support Government Owned Assets

The US and UK governments still own very large stakes in companies like GM, Citigroup (NYSE:C), Lloyds Banking Group (LON:LLOY)) and RBS (LON:RBS). The US is ahead of the UK when it comes to reducing its stake, so we will analyse how outside investors are playing these names ahead of the GM IPO.

GM is 61% owned by the Treasury department and the company is planning to offer about 365m shares to raise money with which to buy shares back from the US government. Speculation is rife as to the share price range for the IPO and the likely direction of this share price thereafter. Most of the activity to be seen in the securities lending market concerns GM bonds.

This isn’t surprising since creditors of Motor Liquidation Co will get a stake in the new GM to the tune of about 10% depending upon the price of the IPO thereby throwing up an arbitrage. Stock on loan in the Motor Liquidation bonds (MTLQQ) is 550m for the 8.375% issue and there is 850m held in lending programs. There is action too in the 7.7% issue with 5m shares borrowed. This looks to be a popular trading opportunity.

Motor Liquidation Co equity (MTLQQ) sees action on the short side. 9m shares are borrowed, up from 4m six months ago, which represents 1.5% of all shares. Meanwhile the proportion of these shares held by funds who lend is gradually reducing - but for a recent spike - and is a mere 2.2m shares. Clearly, prime brokers are sourcing these shares outside of the usual Agent Lender pools with demand to borrow being greater than regular supply.

Citigroup is another interesting government owned name. In the week in which the company seems to be making progress defending itself against Terra Firma regarding the takeover of EMI we can see steady and strong institutional buying. In the last 2 years the proportion of Citi shares made available by institutions to borrow has increased from 1bn to 4.5bn, which is now 20.3% of all shares. The US government has been trying to sell its stake and it looks like a good portion is being bought by institutions, which bodes well for the company given the long term time horizon adopted by investors who lend. Very little of this is being borrowed.

Turn to the two UK banks in Government ownership. We see an increase in institutional ownership, particularly in the case of RBS. Eight hundred million shares have moved into the hands of institutional funds who lend, which is almost 6% of the company. The Treasury still owns over 80% and short selling is miniscule.

Lloyds Banking Group announced results this week, which some commentators described as rather mixed and lacking in detail. Lending funds have been buying more LLOY but not as aggressively as RBS indicating their preference for the latter firm. They own 12% of LLOY but this has not increased much over the last few months and it’s worth noting that LLOY has a much smaller government stake at 41%. Short selling is also low at 0.1% of total shares in LLOY but this did increase into this week’s results by 23%.