Despite the uncertainties of 2009, signs of a recovery began to appear and DRs bounced back strongly, showing that as an asset class they had staying power, a fact which might have been less obvious had there been no global financial crisis.

 

“Recovering to almost their pre-crisis levels, key DR markets demonstrated remarkable resilience in a year of high volatility in the world’s equity markets,” says Claudine Gallagher, global head of depositary receipts for J.P. Morgan Worldwide Securities Services. “Their performance in 2009 was extraordinary, considering that in 2007, for example, the IPO market was robust and large amounts of                                                      capital were flowing into equities.”

 

Two developments are worth noting since equities markets, particularly in Asia, began to bounce back early in 2009. First a fair number of companies anxious to raise capital in the equities market have resorted to issuing DRs instead of going through a normal initial public offering (IPO).

 

Second, institutional investors  – a lot of which exited the equities market during the peak of the global financial crisis in 2008  – are buying DRs as a means of getting re-invested in the equities market, thus, fuelling strong demand for DRs in 2009.

 

This partly explains why in the first 11 months of 2009, the number of companies issuing DRs for their IPOs jumped 68% from its previous level in 2008, with 22 new issuers raising almost US$8 billion, according to DR Market – 2009 Year in Review, an annual study of the DR industry conducted by J.P. Morgan.

 

According to BNY Mellon in a report issued in December 2009, over 750 new DR programmes were established from October 1 2008 to December 4 2009. Four major banks currently provide DR services: J.P. Morgan, Citibank, Deutsche Bank and BNY Mellon.

 

Despite declining economic and market conditions in the first half of 2009, a total of 80 DR issuers from 28 countries created 91 new DR programmes during the first 11 months of 2009, bringing the total number of sponsored DR programmes to 2,122 globally. 

 

DR liquidity remained close to the record levels witnessed in 2008, only marginally declining from 131 billion DR shares traded globally during the first 11 months of 2008 to 124 billion DRs traded in the same period in 2009.

 

 

“For issuers, depositary receipts give them better access to investors outside their home markets,” says Gallagher. “This is because DRs facilitate cross-border investment  – representing the shares of a foreign company, these instruments allow investors to trade locally and in their home currency and are processed through local settlement systems. Such conveniences make DRs an easy way for investors to buy into foreign companies to diversify their portfolios as well as tap into the growth of other economies.”  

 

New York-listed American DRs (ADR) dominate the ADR market, driven by issuers from Brazil and China. Global DRs (GDR) are popular with European issuers. Banco Santander Brasil became the largest ever DR IPO from Brazil raising US$4.5 billion in 2009. Another landmark ADR that took place in 2009 was Shanda Games (China), the largest single-listed IPO in DRs from China. J.P. Morgan serves as the depositary bank for both.

 

In the first 11 months of 2009, a total of 33 existing issuers from around the world raised US$9.2 billion in the US, Europe, or Asia through follow-on offerings, almost the equivalent of the US$10 billion raised by 25 issuers in 2008. 

 

 

The strong trend for DR issuances is expected to continue in 2010 in view of the steady increase in capital raising via DRs, particularly as emerging market issuers continue to tap the US, Western Europe and Asia to meet their capital requirements, according to Gallagher. 

 

The Asia-Pacific is expected to be the most active region, with China and India leading the DR capital raising, followed by Taiwan. Newer markets too, such as Vietnam, are expected to emerge in the next 18 to 24 months.  

 

Russia is expected to lead DR capital raising in Europe, the Middle East and Africa (EMEA), although new regulations may set tight limits on capital raising from that market. Depending on financial market strength and stability, some deal flows may be seen from new or nascent DR markets in the Middle East, the Commonwealth of Independent States (excluding Russia) and Sub-Saharan Africa. 

 

In Latin America, Brazil and Colombia, and to a lesser extent Mexico, may see DR-related capital raising.

 

 

J.P. Morgan expects DR IPO offerings to remain a popular route for private equity firms to exit their investments, especially in high-growth sectors such as online education, biotech, alternative energy, internet and consumer sectors in emerging markets, Gallagher says. 

 

Although ADRs and GDRs are expected to remain the principal forms of DRs, more localized versions of DRs are expected to come into the market to tap available capital in markets such as Hong Kong, Taiwan and India. 

 

The Hong Kong Exchanges and Clearing (HKEx), for example, now offers foreign issuers access to Asian investors through Hong Kong DRs. Although no Hong Kong DRs have yet been issued, Gallagher expects companies to take advantage of this instrument in the coming years.

 

The first Indian DR is expected to launch in the first half of 2010, while more issuers from China and Singapore are expected to list on the Taiwan Stock Exchange using Taiwan DRs. In addition, the government of India is examining a proposal to amend its existing rules governing ADRs to allow Indian companies easier access to the US market. 

 

Outside of Asia, new Russian regulation makes it possible for Russian companies to establish over-the-counter ADR programmes. The previous regulation required Russian issuers to raise capital when circulating their DRs offshore. 

 

 

On the other hand, the strong demand for DRs has resulted in the rapid increase in the number of unsponsored ADR programmes in 2009 as global depositary banks continued to create them, often without issuer consent or meaningful investor demand. These programmes, a good part of which are illiquid, have been created under exemptions that the SEC has permitted since it amended Rule 12g3-2(b) in October 2008.

 

“Of note, more than 50 unsponsored ADR programmes, predominantly for issuers from Japan, have been terminated at the request of issuers who had not given their consent to the depositary banks that created them. J.P. Morgan, on the other hand, maintains a collaborative, consultative and transparent approach with issuers when establishing unsponsored programmes,” Gallagher says.