A short story about Enbridge’s financing, with a twist

Massive short covering.

That was the explanation one investment adviser gave the other day when trying to explain the sharp play the proportion cost of Enbridge dads and moms following a massive $2.3 billion equity financing.

That financing, announced following the markets closed on Feb. 24, was larger than previous Enbridge financings, was costing a considerable discount (5.7 percent) and closed in a shorter period than usual.

Well, that explanation, given in front of the official conformation that came Thursday, is off the mark. Mid-morning the TSX released its bi-monthly list of Top 20 short positions.

But resistant to the expectation, the TSX data showed that instead of decreasing, the Enbridge short position had increased. As after February, the short position stood at 47.792 million shares. Fourteen days earlier it was 37.194 million shares so for that two-week period, rapid position rose by 10.598 million shares. For that month of February, rapid position jumped by 16.348 million shares.

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So, the facts seem to get in the way of massive short covering as being a satisfactory explanation. “It doesn’t make sense,” said one market participant, who also noted a potential explanation might be a one-day difference between the publication from the short position and the closing from the financing.

So an alternative theory is needed. Here’s one possibility.



The TSX short position statistics are like a corporate balance sheet: they measure the situation at two points of time, meaning what happens between the above points in time is not known.

But it’s feasible that between the start and end points the short position did decline – before rising by month end.

That scenario is advanced on the basis there is market talk that Enbridge, given its capital expenditure need, would have to do an equity raise at some stage. That knowledge might have encouraged some short selling given that the equity issue, if and when it came, could be for a cheap price towards the prevailing selling price. And when that raise occurred the short sellers could cover the short position either from an allocation in the new issue or from buying in the market.

So a shorting strategy made sense.

When the equity issue arrived, it had been both large and priced to sell therefore the underwriters had little difficulty to find buyers: actually demand was big enough for the underwriters to exercise the $300 million over-allotment option. Which demand continued considering that Enbridge’s stock price kept rising.

Indeed part of that rise might have been caused by short covering: shorters covering their position by purchasing stock in the market.

While that activity would cut back the general short position, some investors, once they received an allocation, might then short the stock within the full knowledge they’d be able to cover rapid with shares within the new issue. “A large amount of brokers do that. They are given an allocation, they hedge their position and choose closing,” noted one adviser. “We will receive a better concept of what happened once the mid-March numbers are freed.”

While this explanation is specific to Enbridge, other market participants argue the developments are part of a bigger “dynamic,” and reflect unusual market conditions. “It’s a macro call, part of the short Canada story,” noted one participant.

bcritchley@nationalpost.com