Depositary Receipts Maintain Popularity with Issuers and Investors in 2010

Despite economic uncertainty and volatility in the global equity markets in 2010, depositary receipts (DRs) remain popular with both issuers and investors, according to JP Morgan’s ‘DR 2010 Year in Review’ report.

In the first 11 months of 2010, trading value increased 26% compared with the same period of 2009. The value of DRs traded in the first 11 months of 2010 was US$3.2 trillion compared with US$2.5 trillion in the same period of 2009. Trading volume for the first 11 months in 2010 was 138 billion DRs versus the same period in 2009 when volume was 124 billion DRs, an 11% increase.

Issuers raised more than US$20.3bn through primary and follow-on DR offerings in the first 11 months of 2010, compared to US$17.1bn in the same period of 2009. Initial public offering (IPO) capital-raising saw 72 new issuers raise US$6.9bn in the first 11 months of 2010 through IPO listings in New York, London, Luxembourg, Paris, Singapore or through private placements, as compared to 22 issuers raising US$7.9bn in the same period of 2009. Brazil, Russia, India and China (BRIC countries) accounted for 90% of total capital raised. The DR IPO markets in China and India bounced back with 29 and 32 IPOs, respectively, a new record. 2010 also saw the first DR IPOs from Russia and the Middle East since the second quarter of 2008.

“Key DR markets remained resilient in 2010. As issuers from emerging markets continue to access the US, western European and Asian capital markets, we expect a steady increase in capital-raising via DRs,” said Claudine Gallagher, global head of JP Morgan’s DR business. “We’ve seen markets in Hong Kong, Brazil, India and Russia facilitate the creation of new local DR programmes and we expect that trend to continue in 2011.”

Other key findings from the report include:

  • One hundred and eight issuers from 19 countries created new sponsored DR programmes during the first 11 months of 2010, increasing the total number of sponsored DR programmes globally to 2,217.
  • Total DR capital-raising was driven by the US$10bn Petrobras follow-on offering in 3Q10, the largest capital-raising event in history. JP Morgan acts as the depositary bank for Petrobras.
  • Twenty-one existing issuers raised US$13.4bn in the US, Europe or Asia through follow-on offerings in the first 11 months of 2010, a 46% increase as compared to US$9.2bn raised by 33 issuers in the same period of 2009.

A Year of Firsts

This year saw the first-ever listing of Hong Kong depositary receipts (HDRs) on the Stock Exchange of Hong Kong by Vale of Brazil. JP Morgan acts as the depositary bank for Vale.

Standard Chartered raised US$530m by launching the first-ever Indian depositary receipt (IDR).

Following a BM&FBovespa (Brazil) regulation change in 2010, the first 20 unsponsored Brazilian DRs (BDRs) started trading in the fourth quarter. BDRs are backed by US equity shares that trade on Bovespa’s over-the-counter (OTC) market. JP Morgan expects the number of unsponsored BDRs trading on the Brazilian exchange to increase gradually in 2011.

In December, Russia’s United Company Rusal announced plans and filed the prospectus to create the first Russian depositary receipt (RDR) programme, for which Sberbank will serve as the local depositary bank. Rusal is expected to launch its RDR programme in late December or early 2011.

Themes to Watch in 2011

IPO capital raising: a steady increase in DR capital-raising from emerging markets is expected as companies continue to access capital in the US, western Europe, and Asia to meet their funding requirements.

Asia-Pacific is expected to be the most active capital-raising region, with China and India continuing to lead through ADR and GDR offerings, respectively, followed by Taiwan and South Korea. Vietnam and Mongolia are expected to emerge as new DR markets over the next 12 to 24 months.

Russia, where the government is expected to embark on a major privatisation initiative, will likely lead DR capital-raising in Europe. Depending on financial market strength and stability, deal flow may also be seen from new or nascent DR markets in the Middle East, CIS (ex-Russia) markets and in sub-Saharan Africa, particularly Nigeria.

In Latin America, Brazil, Colombia and Mexico are likely to see capital-raising activity in 2011, with Brazil the most active market in the region.

Local DRs: in 2011, ‘local DRs’ should continue to evolve. (Local DRs are structured to better tap equity investors in new markets, providing local currency-denominated investment vehicles in markets such as Hong Kong, Brazil, India, Taiwan and Russia.) JP Morgan expects more issuers from China and Singapore to list Taiwan DRs on the Taiwan Stock Exchange. Regulatory changes in China in the next 12 to 24 months may allow foreign companies to list on China’s stock exchanges.


Related reading