The stars are aligning for plan sponsors and other institutional investors with securities lending programs.
Mergers and acquisitions, initial public offerings, convertible bond offerings, a new 30-year bond and a changing interest rate environment will combine to keep securities lending revenue strong in 2006, according to industry participants.
In addition, the ever-popular dividend arbitrage play in European stocks is expected to remain strong next year as more companies either increase their annual dividend or reinstate them.
"The equities markets have been very good to us — domestic equities, particularly — with the increase in M&A activity and IPOs," said Kathy Rulong, executive director of Mellon Global Securities Lending, a unit of Mellon Financial Corp., Pittsburgh.
"We've also had a good year on the Treasury side; there's been good demand for general collateral government securities as well as a lot of specials," she said, referring to securities that are in particularly heavy demand. "So we're going into the new year with that."
In 2005, M&A activity was hot in several industry sectors including retail, power and utilities, oil, health care and financial services, and expectations are that it will continue through next year. In addition, IPO activity, which rebounded sharply this year, is expected to remain solid.
"M&A activity continues to be strong across the globe, and that's a good sign for a robust securities lending market," said Mark Payson, senior vice president and co-head of global securities lending at Brown Brothers Harriman, Boston.
Edward J. O'Brien, executive vice president and head of securities finance at State Street Corp., Boston, said that in addition to stock activity, growth in convertible bond arbitrage bodes well for securities lenders in 2006.
"To the extent the M&A and deal calendar continues to look promising, you will see a corresponding pickup in demand for securities to borrow," he said. "Another driver is going to be continued growth in convertible bond arbitrage. We see that picking up."