By Maiya Keidan
TORONTO (Reuters) - Hedge fund bets against Canada's TD Bank Group hit $6.1 billion on Wednesday, a 45% increase from 14 days ago, according to data provider ORTEX's calculations, one day ahead of the Canadian lender's annual general meeting.
Analysts attributed the short bets to the TD's planned acquisition of U.S. lender First Horizon (NYSE:FHN). The transaction has come under scrutiny since the collapse last month of U.S. regional lenders Silicon Valley Bank and Signature Bank (OTC:SBNY), and some shareholders have urged TD to drop the deal or renegotiate a lower price.
"I think that short interest was elevated by arbitrage investors betting on the (First Horizon) deal ... suggesting that the market believes that the deal is at risk of closing," said James Shanahan, an analyst at Edward Jones.
So-called 'arbitrage investors', many of which are event-driven hedge funds, bet on mergers and acquisitions by buying shares of the target and shorting the acquirer's stock.
"I think the biggest factor is noise around closing of First Horizon and what TD could be paying for it," said Lemar Persaud, an analyst at Cormark Securities.
Persaud said the failures of SVB and Signature Bank are a factor given TD's substantial retail operations.
TD, which is awaiting regulatory approval of its takeover of First Horizon, is expected to address the $13.4 billion deal at its AGM on Thursday in Toronto.
Around 5.5% of TD's outstanding shares were out on loan to hedge funds betting against the company, while the second-most shorted bank stock, Bank of America (NYSE:BAC), only had $2.9 billion, or 1.2%, worth of short bets, the data showed.
Hedge funds profit when they borrow a stock from an institutional investor and sell it back when the price falls, pocketing the difference, a practice known as short-selling.
TD shares are down 0.1% since the U.S. regional banking crisis began, and up 3.4% this week.
While Bank of Montreal and Royal Bank of Canada are also exposed to the U.S. banking system, they had around $2.1 billion and $2.2 billion worth of shares out on loan, respectively, according to ORTEX data.
A spokesperson for TD declined to comment.