Regional depositary receipt programs are proliferating as issuers seek to tap into new capital
The perennial challenge for IR teams is the search for capital. They are long used to ports of call in the US and the UK, but there are now some new places to go hunting. Russia, Hong Kong, Brazil and India are among the highlights on their redrawn map.
As globalization does its thing, the world’s wealth shifts. In 1990, 30 countries had financial assets exceeding their GDP; by 2006, that number had risen to 72 countries, according to McKinsey Global Institute research. And in this same 16-year period, global financial assets rose from $43 tn to $167 tn.
So there’s more money to invest, and it crosses borders more easily. Cross-border investment was at $74 tn in 2006 and one in every four equities had some degree of foreign investment, McKinsey reports.
To date the most commonly used instruments for cross-border investments have been depositary receipts (DRs). For companies in less developed regions like China or Latin America, DRs generally give the easiest access to US and European capital; especially American depositary receipts (ADRs), which can be listed on NASDAQ or the NYSE. With new ‘ports of equity’ emerging around the world, so-called reverse DRs are being developed to tap capital far from the US or Europe. Brazil already has one, for instance, the aptly named Brazilian depositary receipt, or BDR.
In the past year and a half, securities rules have been introduced or amended in Russia, Japan and India for RDRs, JDRs and IDRs, respectively. ‘Although these have been positive developments, we are still in the early stages of product evolution on some of them,’ says Claudine Gallagher, global head of JPMorgan’s depositary receipts business. ‘So far, none of them has been launched.’
While local DRs have long been a point of discussion between the depositary banks and issuers, there is more momentum now. ‘In 2007 and into 2008, I’ve seen a lot of headway,’ says Nancy Lissemore, global head of depositary receipt services for Citi.
In India, for example, Lissemore says there has been ‘renewed interest from non-Indian issuers and many more detailed meetings between regulators and market participants on exactly how an Indian DR could be listed and how it would work.’
The Hong Kong Stock Exchange just announced its final listing rules for an HDR (sometimes called an HKDR) on July 1. Companies can’t just list; they must also raise new capital. ‘We have quite a few issuers interested,’ Lissemore says.
The right investor pool
The financial pages have been filled with stories about companies contemplating regional DRs. For example, Hong Kong-listed textile company Huafeng Group is exploring a Korean DR, and India’s Tata Motors is looking at a JDR. These cases seem to present the most appropriate use of a regional DR. In the past these companies might have looked to the US or Europe as a source of funds, but familiar Asian ground could present an easier alternative.
Local exchanges are responding to companies’ interest in marketing shares to investors closer to home. Russia, Hong Kong, Brazil, Singapore and Japan all ‘want to be seen as the dominant financial hubs in their regions and are pushing forward with local DR structures of their own to attract issuers within the region,’ Gallagher says.
With the prospect of an RDR, some Russian companies that have been incorporating and listing abroad will finally get access to investors in their home market. ‘We are a Cayman-registered company, but despite having most of the business in Russia, we have limited access to domestic capital markets,’ explains Andrey Machanskis, head of IR for oilfield services firm Integra. ‘Liquidity is our primary motivation, as well as expansion of the shareholder base.’
With the proliferation of options now available, the process of capital raising will look different. ‘New combinations of companies in country X will want to list cross-border in country Y,’ says Edwin Reyes, managing director and global product head for depositary receipt services at Deutsche Bank.
Reyes suggests the hypothetical case of an Asian auto parts company that goes to Europe to raise funds instead of staying in Asia because Europe is the home market of global players in the sector. ‘In the end, it is about bringing the company to where its peers and potential investors are,’ Reyes says. ‘From the IR standpoint, that’s where you raise the profile.’
Even companies already trading in the so-called capitals of capital, New York and London, may be candidates for these smaller markets. On the ‘IR in a global economy’ panel at the recent NIRI annual conference in San Diego, Guy Gresham, a team leader in the market development and access team at the Bank of New York Mellon, said he saw the possibility of a company like ExxonMobil one day setting up a DR program in China to compete for capital in PetroChina’s home market.
On the same panel, Sam Levenson, senior vice president of IR at Sony Corporation of America, said his company had a large presence in India through selling electronics as well as producing television and Bollywood movies, which could translate into a pool of interested investors. Sony is trying to grow the brand in Brazil, Russia and China, too. ‘I’m intrigued by the potential of doing DRs in some of those markets,’ Levenson said.
Growing the exchange
The push for regional DRs is also coming from the local stock exchanges themselves. When Royal Bank of Canada (RBC) completed a $2.2 bn cash-and-stock takeover of RBTT Financial Group, Trinidad’s largest bank, in June this year, it removed a good chunk of the market capitalization and trading volume of the Trinidad and Tobago Stock Exchange (TTSE). ‘To replace that, the Trinidad and Tobago SEC asked RBC to have a Trinidadian DR, and it agreed,’ says Geron Burnett, an operations officer with the TTSE. A press release from RBC confirms the interest.
There has been mention of BHP Billiton and ArcelorMittal as candidates for a Trinidadian DR as well. In any case, the TTSE, which currently has 37 listings, would like to give local investors more options. ‘That is one of the benefits we see,’ Burnett says. ‘We’re hoping to get some sponsored DRs, but most likely they will be unsponsored.’
Chris Prior-Willeard, vice president of innovation in the Bank of New York Mellon’s DR division, says competition between exchanges is part of this story. ‘The ambition of every small stock exchange is to take a bite out of global liquidity,’ he says.
The depositary banks are enthusiastic about the prospects, but Reyes says the process of launching new DRs has its complications. ‘The challenge for us is to be able to set up the infrastructure in new markets,’ he explains. ‘Technology drives the markets today, and ideally there should be common platforms for trading and settlements.’
Still, the main drivers will be issuer and investor demand. Issuers see the wealth accumulating around the world and want to get rid of the walls between them and investors. As Gallagher points out, Mexican mutual funds can invest only 15 percent of their assets in foreign securities, and pension funds in Chile are restricted from investing in foreign securities. Regional DRs could provide a way around those limits. Firms know they need local instruments to provide broader global exposure, Gallagher says.
Investors, in turn, have their goals. ‘Investors would like to trade securities in their own time zones, trade in the local currency and avoid the cost of opening custodial accounts around the world,’ Lissemore says.
Not every local DR structure will be successful. Much depends on ease of listing and the continuous obligations issuers face. The degree of transparency that investors believe they are getting will also affect their success.
‘Liquidity will eventually gravitate to the stock exchange that offers the best liquidity and the deepest pool of investment monies,’ Gallagher predicts.
Market watchers are waiting for some good examples. ‘If one lists and it’s successful, others will follow,’ Lissemore concludes.
