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The+Lure+of+Foreign+Shares

The+Lure+of+Foreign+Shares - mmmJ Deposijzaryfleceipts |...

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Unformatted text preview: mmmJ Deposijzaryfleceipts | By Gordon Flatt The Lure Oi Foreign Shares Banks have created 1,400 new unsponsored ADR programs to meet— and hopefully generate—growing demand, particularly from investors in separately managed accounts. he long drought in initial pubiic offerings has slowed the pace of raising capital in response to market demand, without in the form of depositary receipts, but trading in these instruments is grow— a formai agreement with the company ing rapidiy as investors continue to diversity their portfolios with securities of whose shares are being traded some of the biggest companies worldwideiAs risk appetite returns, many investors are Michael Cole—Fontayn, chief execu— aiso seeking to gain at least some exposure to the faster—growing emerging markets. tive of The Bank of New York Mei~ Depositary receipts enable investors to purchase and sell interests in foreign lon's depositary receipt division, says shares without experiencing the settlement delays and other probiems that can growing demand from US investors for crop up when deaiing with unfamiiiar trading systems in distant countries Trading wider access to international equities in American depositary receipts (ADRs) and global depositary receipts {GDRs) for portfolio diversification convinced increased by 34% last year to a record $4.4 trillioniSoine of the activity reflects volm the bank to move aggressively to set up atile market conditions, with investors Hazing and, re_entér.ing foreign markets DR Trading Value Switzerland: 101 as economic conditions changed in the B C t l 2008 wake of the global financiai crisis y oun ry n France: 105 US investors are able to trade receipts ($ bll'ion) reflecting ownership in shares denomi~ noted in doilars in more noanS com« panies than ever before. More than 1,400 Other: 1,161 new cosponsored ADR‘ programs have been created since October 2008, when the US Securities and Exchange Com- mission relaxecl ruies for trading deposim tary shares of major overseas companies in the over-the counter market US de— positary banks can now register unspen- sored ADRs on the equity securities of any non—US company that automatically qualifies by meeting certain ongoing trading and oniine disclosure require— ments Unsponsosed ADRs are securities issued by one or more depositary banks Brazil: 899 Source: Elie Bank oi New ‘z’ork Mellon W July/August 2009 | Globe? Finance | 33 !0 new unsponsored ADR. programs These programs have proved especially popular with managers ofseparateiy managed acm counts (SMAs) that are restricted to in— vesting in dollar—denominated securities Most SMA platforms are not designed to handle foreign currency transactions Also known as separate accounts, or wrap accounts, SMAs are similar to mutual funds aimed to inciude particular asset classes. The major difference is that the SMA manager purchases the securities for individual clients rather than a fund. SMAs are sold to high—net—worth indi~ viduais through major brokerage houses. The Bank of NewYork Mellon has is— sued more than $1.4 hillion of unspon— sored ADRs since the SEC. impiementw ed rule changes last October to make it easier to establish these securities "insti— tutional and retail investors alike can no longer ignore this segment of the AER. universe," Coie—Fontayn says. The bank has created 715 new unsponsored pro— grams {tom 35 countries, far more than any other depositary bank ”The regulatory change was signaled iay the SEC fairly clearly in advance, which enabied us to he in active diaiogue with the overseas companies that were good candidates for unsponsored pro— grams even before the rule was issued,” Cole—Fontayn says The bank’s staff put in many hours doing the appropriate due diligence, he says.“We had to make sure that the websites of these companies ful— filled the SEC. requirement that certain disclosures are made available on a timely basis in English.” he explains. “We aiso had to make sure we were in compliance with know—your—client reguiations " Of the hanit’s 715 new unsponsored programs, 164 are activeiy traded, Cohe— Fontayn says. “Ofthe thousands of'nonw US companies without ADR. programs, we selected those likeiy to attract the most interest from investors,” he says These included companies that are con- stituents of local indexes that investors like to benchmark and companies that were suggested by major investor clients of the bank “Despite turbuient market condi- tions, we are not surprised at the sig»« Regional ADR Indexes Jun 13. 2008 Jul 11. 2008 Jul 25. 2003 Aug 1. 2008 May 30. 2008 Jun 30. 2008 Aug 15, 2008 Sep 12. 2003 Aug 29. 2008 34 l Global Finance: July/August 2009 Sep as, 2096 Doc 26. 2008 Oct 3. 2008 Jan 2. 2009 Oct 17, 2008 Nov 14, 2008 Nov 28. 2008 Dec 12, 2008 Jan 16, 2009 Jan 30. 2009 Oct 31, 2008 nificant investor interest in these secu» ritics," Cole—Fontayn says “For years US investors have insisted upon a more complete roster of international equities for greater portfolio diversification.” In May The Bank of New York Melw lon introduced a Classic ADR Index that expands the investable constituents of the bank’s weil—irnown ADR. index to include all publicly traded ADRs, in— cluding those that trade in the over-“thew counter market The new index includes .34 subindexes and offers much greater coverage ”When added to existing spon~ sored ADRs, the new unsponsored pro— grams enable investors to better repiicate many of the world's ieading foreign eqw uity indexes in USwtraded, doilar—de- nominated securities, the hank says. Some 15 to .20 companies contacted by The Bank ofNewYorl: Mellon about setting up unsponsored AER. programs decided to create sponsored programs with the bank instead . Since then, anoth— er handfui of companies switched from unsponsored to sponsored programs, and an additional 60 are considering making Mar 13. 2009 Feb 13, 2009 H Feb 27. 2009 Mar 27. 2009 Apr 3. 2009 A Apr 17, 2009 Apr 30. 2000 May 8, 2009 May 22. 2009 De prt op: WC For We Asl inn} ©2C Con sail - FED the Change, according to Cole—Fontayn Edwin R eyes, giobai product inan— ager for depositary receipts at Deutschc Banit, says that, in the past, initial pub— lic offerings were a good source of new sponsored DR, issues and that the cur— rent drought in lPOs has heen chal~ longing for ali of the depositary banks. Despite these chalienging times, the SEC: ruie change has created a timeiy opportunity for the depositary banks to be more active in opening unsponsored programs, Reyes says Of the approxiw mately 435 new unsponsored A1311. programs introduced by Deutsciie Bani: since last October, more than E30 are {or companies based in japan, Far more than in any other country “Historically, year after year, Japan-based companies have had more unsponsored as opposed to sponsored programs," he says. The approach of Deutsche Bani-t has been to vet propOsed programs with the issuing companies, even though this is - cole'prntayn: investors.- are demanding access ' _ to international equities _. not required, Reyes points out “We try to educate the companies, and we work closely with them by ofiiering seminars and working with third parties, such as law firms," he says. “This is favorabie for the issuing companies.” Some ofthe new unsponsorcd programs are gain— ing traction and are activeiy traded, he notes. ”We are happy with what we are seeing, and we are optimistic," he says. As part ofthe consultative process with non—US issuers, the bani: has an opportu— nity to expiain the benefits of sponsored ADR. programs, according to Reyes ”In the end, we would prefer that the pro~ 36 E Global Finance[ ' Gail'agher: Unsponsored' ‘ programs take time to . ‘ attract trading interest grains be sponsored," he says Deutsche Bank has been successful in having sever» al companies upgrade their unsponsored ADRS to sponsored programs, including France—based water distributor Vivencii, which is transforming itseif into an enter- tainment company, and Spain—based Gri— fols, which serves healthcare professionals and deveiops plasma derivatives "Some companies with unsponsored programs opened by other banks have told Deutsche Bani: they do not want such programs and asked the bank not to open any," Reyes says. ”In such cir— cumstances, the bani»: always respects their wishes,” he says. He adds that he is comfortable with unsponsored programs for the same issuers being introduced by multiple depositary banks .“We have been working successfiiliy with unsponsored programs for decades," he points out. Nancy Lissemore, global head of den positary receipt services at Citi, says that well over half ofthe 231 new unspon— ‘ehisbnmn not: listing: was" a company more 'ontrpl sored ADR. programs introduced by the bank since Octoher 2008 have become activeiy traded Citi is also the deposi— tary bani»: {or 82 unsponsored programs that were created before the SEC’s re— laxed new registration ruies came into effect “Our decisions on which new programs to open are driven by inves— tor demand,” Lissemore says..“We are in communication with large investors, so we know their needs, and we select is— sues that are wideiy heid in non—doliar— denominated portfoiios,” she adds. ”The success of‘ these programs has highiighted to issners that there is pent— op demand among US investors for blue—chip companies listed on overseas exchanges," lissemore says. Some of' the new unsponsored ADR, programs ai— ready have converted to sponsored pro— grams. One notable exampie is Ibcrdro~ la Renovables, based in Bilbao, Spain, which is the woriti’s iargest windmpower generator and has interests in other forms of renewable energy. Banks Target Japan A significant proportion of Citi's unw sponsored programs are for companies based inlapan, the second—largest econ— omy in the world. ”There are a large number of attractive companies based in japan," Lissemore says Of the more than 3,860 stocks that trade on japanese stock exchanges, only 19 are listed on the NewYork Stock Exchange. Meanwhile, Citi entered into an agreement last December with Mitsubi» shi Uh} Trust and Banking to jointly develop, market and offer _}apanese de» posirary receipt 013R.) services. The jDR. services wiii target issuers based outside ofjapan that wish to raise capiw tai in thcjapanese financial market Citi already has some similar experience in the region, having been the first bank to announce the iaunch ofHong Kong de— positary receipts (l-iKDRs) in “July 2008. “Citi has a strong culture of relation»« ship banking and only opens new pro— grams after discussions with issuers," Lis- semore says if a Foreign company were to stop pubiishing the required informaw {ion in Engiish in a tinieiy manner on its wehsite, Citi would stop inning new ADRS into the program, she says. Recent initial pubiic offerings have been few and far between as a result of market conditions, but there is stili a need for capitai to be raised in the form of sponsored depositary receipts, Lisse— more says. ”I do see the market startm ing to sinmier,”she says ”Once the IPO maritet comes back, you will see some issues from Brazil, India and elsewhere in Asia You can include issuers from the Middle East, as well," she adds. Some major banks have been sioww er to jump on the unsponsored ADE}. ere—1’ ‘43:.» w, “Once the IPO market comes back, you will see some issues from Brazil, India and elsewhere in Asia” bandwagon 1P. Morgan has introduced fewer than 20 programs since the SEC rule change iast October. The bank has been adamant that new programs should be opened in a controlied manner and only with the full consent of the issuing companies. “This mirrors our strategy with sponsored ADR. programs, where we work more selectively with issuers that would expect to attract meaning- ful investor interest and we develop a strategic plan," says Claudine Galiagher, NewYork—based global head of‘the dew positary receipts group at 11’. Morgan. “The various depositary banks have taken very different strategies,” she says. ”I am not surprised by the large num— ber of unsponsored programs that the other banks have created," Gallagher says ”It is easy to open a program, but it will take some time before they attract sig- nificant trading interest.” Even for spon— sored programs that are careiiiliy planned, it can take 18 months for a program to build some momentum. she adds. Many japanese issuers in particular are not keen to have unsponsored ADE pro— grams opened in their shares, and several japanese companies have asked that these programs be closed, Gaiiagher says "They are cautious about their exposure to the US market," she says. “Their own capitai markets are broad and deep, and the focus on client relationships is very importantl would put the Japanese companies in the Same bucket with the mature markets of Western Europe,” she adds. Depositary banks that issue unspon~ sored ADRs need to check. the foreign companies’ websites on a regular basis to make sure that proper disclosures are be~ ing made “This is why it is so important to get the issuers' blessings and to work in conjunction with them,” Gallagher says. Valuations Mirror Market Conditions The trading volume of depositary rem ceipts (ADRS and GDRs) totaled .35 6 billion shares in the first quarter of 2009, a 17% increase from the same period a year earlier, according to }P. Morgan. However, the value of DR trading in the first quarter feil 52% from the same period iast year to $588 biliion, reflect— ing steep market declines. “We are start— ing to see some normalization in the markets more recently," Gallagher says. ”Underwriters are starting to taik about new equity issues once the markets stabilize. They are planning and setting tentative dates for issues," she adds. Meanwhile, the Hood of new unspon— sored ADRs is changing the face of the US over-the—counter market R. Croni— weli Couison, chairman and CEO of Pink OTC. Markets, says almost $100 bli— lion, or two-thirds of the dollar volume traded in the OTC. markets in 2008, was in the form of ADR. trading. “During the next few years half of the new un— sponsored AER. programs wiii switch to sponsored programs," he predicts Corn— panies that are investorwfocused will want the information and control that comes with having a sponsored ADR, he says. Pink OTC Markets is an inter—dealer Capital without borders quotation system for the OTC market On May '15, 2009, it listed its first Brazil— ian company,_l135, the world’s largest beef producer and exporter. The company listed on OTCQX Internationai Premier, the OTC: market's highest tier for com— panies that can meet high international standards for capital, sales and assets. Companies iisted on OTCQX pro— vide US investors with access to their latest news and disclosure information, Coulson says. “OTCQX gives compa— nies listed on a qualified foreign stock exchange a visible Cress—Eisting in the US, without the duplicative regulatory costs required for listing on a traditional US exchange," he says Sponsored ADR. programs historicah 1y have been created to trade shares of established issuers in developed coun— tries \7th companies based in Bra- zil, Russia, india and China accounted for more than half of the total value of worldwide trading in depositary rem ceipts iast year, the BRIG countries ac— count for reiatively few of the new un— sponsored ADR. programs. Many of the big emerging market countries have erected regulatory hurdles to unsponsored programs. The Brazilian regulator CVM, for example, has ap- proved oniy one of 20 recent proposals to create unsponsored ADRs This could be tied in part to the desire of’centrai banks in these countries to control inflows of hot money, bankers say. India permits only DR. programs related to the raising of capital. China allows only Hushare nnw sponsored DR programs for companies listed in Hong Kongiiven in the face of regulatory hurdles, bankers beiieve that with the supply of BRs in the market greatiy expanded, their popuiarity with investors is bound to keep growing Learn how depositary receipts can give your company' access to a wider array of investors. Obtain a free copy of our DR Reference Guide by contacting us at adrraijomorgan tom ...
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