Podcast: Script lending

Simon Shares

Day 126 of lockdown and Covid-19, cases may be moderating?

Sasol (JSE code: SOL) sells some assets for R8.5billion and the stock is up over 12%. The sale is SA gas operations at Secunda. A sale and leaseback as Sasol only customer. But gets Sasol cash to pay down debt so good news short term, less so long-term. Korean websites also reporting on a possible 50% sale of US Ethane Cracking Center for US$3.3billion, which cost +US$12billion to build (for the other bits as well). Trading update due next week will give more details about the LCCP right downs which will surely be massive, but as importantly also maybe on the possible rights issue?
Gold above US$1,900 and looking strong, albeit as I say that it’ll now surely collapse in a heap as even I now own gold stocks?
South Africa gets a US$4.289billion loan from the IMF. It’s a very small amount and at great terms of around a 1% interest rate, albeit currency risk has to be hedged out.

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20 August ~ JSE Power Hour: Pro-active passive management

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Script lending

EasyEquities users got all heated last week on Twitter as EE put T&Cs about script lending into their new mandate. I not commenting on the EE offer as they’ve withdrawn it. But many have asked about script lending as a concept.

If I want to go short (make money from a falling stock) I need to sell shares and naked shorting is not allowed by the JSE (or most exchanges). So I need to borrow stock from somebody.

Usually, you borrow from a large institutional investor who has plenty, you pay a fee and will also be liable to pay the lender any entitlements such as dividends.

This process happens in the background when you’re shorting via derivatives and why some shares are not sortable, no script to borrow.

The script lender earns a fee, but there is risk so default.

Whoever you lent the script to may not be able to return the script.
Maybe they’re just a crook?

Maybe they can’t afford to close out the position. remember they sold to buy back lower, but what if an offer arrives and the stock jumps say 50%?

It certainly can add some income to a portfolio but the risk needs to be managed and the income is fairly modest. That said I’ve never lent out my script but I have borrowed script in recent years for some shorting (Aveng and Lonmin).

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