Ann: Disclosure of Equity Derivative Positions, page-23

Ok, so I'm still up geeking-out, as I do from time to time. I've had a chance to reflect further on one or two niggling thoughts and also read your reply and subsequent questions.

After re-reading the main guts of the annoucement a number of times and coupling it with the facts we know about the recent block trade, there's one point that I'm having trouble reconciling. I fear I *might* have been a little to quick to draw the conclusion around escoteric cash borrowing by GFL.

It requires a break-down on the various pieces of logic and a preparedness to run the flaky HC gauntlet (eek!).

Let's return to this quote from the annoucement:
"GFL International Co., Limited (GFL) advises that it has entered into separate funded equity derivative collar arrangements and related securities lending arrangements (Collar Financing) with each of Merrill Lynch International and Morgan Stanley & Co."

When I originally read I interpreted that it was part of an integrated 'Collar Financing' (<-- keyword) deal. That is, a lending deal (i.e. financing = lending) that involved providing the lender with PLS shares as collateral for cash borrowing from MLI and MS equally, while at the same time structuring the derivative collars and insurance mechanisms. There's nothing inherently wrong with this interpretation per se, but what has been nagging me was why the lenders would then turn around and block sell a good chunk of those shares? Possibly to fund the cash lending to GFL? That is, using cute legal gymnastics to have a third party sell your shares to raise cash as a loan without having to book a capital gain? Ok, but that only works on the basis it eventually is repaid at which point the whole thing gets unwound. But the amounts involved are not even close to one billion dollars, so why bother jumping through all those hoops?? Is GFL such a credit risk right now that this is the only way it can raise funds? I find that hard to believe

The more I thought about it (ruining my sleep patterns for tonight -- lol), the more I thought there might be more to it that first meets the eye.

It's just a hunch, but what if it had nothing to do with lending and the use of "financing" (in "Collar Financing") was used in a more general financial management sense. That is, by putting a 'lazy' shareholding to work by lending it out to...yes, dear readers, filthy s-s-s-shorters (eek!) for a fee while also employing a traditional collar-based risk-management strategy to protect the downside. Oh the humanity!

I'll break down shortly, but before I do I should clearly state that this whole analysis is a potentially fraught exercise because the disclosure announcement was only designed to meet the specific obligations of the one aspect of the larger deal which required disclosure. The announcement doesn't cover all aspects of the deal, which has us reading the tea leaves and all the potential problems that go along with that.

The collar arrangements put in place equally between GFL & MLI and GFL & MS look like a well-worn risk mitigation strategy performed by a large holder who might have a LT mindset, but is a bit concerned with near-term SP risk and is wanting to protect the near-term downside by going long out-of-the-money Puts and funding that hedging by selling (shorting) out-of-the-money Calls. Note the asymmetrical nature of the Put/Call strike prices. The strike prices for the Puts are much closer to the current SP than those of the Calls. Typical for this risk-management strategy. Measured in isolation one would be forgiven for forming the view that GFL was worried about the near-term and wanting some downside protection without necessarily selling their holdings. Pretty straight-forward so far.

But why lend a decent chunk (61%) of its existing shares to the intermediaries? And why have those intermediaries turned around and facilitated their "secondary share sale", as reported by AFR (yeah, I know, a secondary source...)??

Dale had to pass on this information and I can understand him effectively saying "nothing to see here", "full disclosure", yadda, yadda. I get it. But the more I think about it -- particularly the BLOCK ON-SELLING OF LENT-OUT STOCK ON THE SAME DAY AS THE ENTRY DATE FOR THE COLLAR IN THE DISCLOSURE DOCUMENT (2 Oct)!! -- the more I'm inclined to drop Door #1 (the lending scenario) like a hot potaaato and switch to Door #2 (the Dark Side scenario), as much as it pains me to do so. I'm not naturally a conspiracy theorist, so trust me when I say it deeply pains me. I am, however, a brutal realist who has a deep aversion to denial.

Circling back to the previous caveat, this whole analysis might be meaningless, given the incomplete nature of the publicly available information for the entire (larger) deal. However, large block sale and that 1.7% (~51m share) gross daily short spike on Thursday 3 Oct plays into the Door #2 scenario rather worryingly. Yeah, I might have worked myself into a bit of a lather and it might be confirmation bias at this juncture, but then again...

In short Door #2 is: GFL has undertaken a downside risk-mitigating collar strategy while also lending its shares out to intermediaries who facilitated a near-immediate short sale block trade. Am I really writing this?

I guess we'll find out during the passage of next week when the T+4 net short sales data drops. We could very well find another ~100m shares added to the short-sold ledger, heaven forbid!

Well, I didn't see that all-nighter coming. I'll off now before sunrise and I turn into a carrot, or pumpkin, or whatever.

Let's hope I've cocked it up royally and there's a Door #3 that has not been contemplated. (I vote for rainbows and unicorns... and pixie farts, which, I'm told, smell like fresh roses.)