Corporate Finance Focus
If central banks and government agencies around the world can exit accommodative monetary and fiscal policies smoothly, 2010 could be a good year for capital raising using depositary receipts, market participants say.
"The windows of opportunity will be fairly small," says Michael Cole-Fontayn, chief executive of BNY Mellon s depositary receipts division. "But companies that are well prepared with their project plan, display industrial logic and which have good governance and transparency, as well as access to sources of liquidity, will be able to tap the DR equity market."
Most of the new issues this year are expected to come from the BRIC countries - Brazil, Russia, India and China. "We have already seen Rusal, the world's biggest aluminum company, and China Hydroelectric, as well as a number of smaller India-based companies, tap the market this year," Cole-Fontayn says. "We absolutely expect that there will be more issues from China, where I have recently met with 11 companies that are planning to come to market in the next six to nine months," he says.
Cole-Fontayn recently returned from a trip to Latin America, where he expects companies from Mexico and especially Brazil to be active DR issuers this year. Banco Santander Brasil raised $4.5 billion last year in depositary receipts, which listed on NYSE Euronext.
The key to a favorable market environment in 2010 will be ensuring that policy stimulus is moderated in a way that does not conflict with changes in bank capital and liquidity requirements, Cole-Fontayn says. "Issues around timing and coordination among countries and regulators on macro-prudential supervision could arise," he says. "Meanwhile, country risk has come back to the fore with Greece's debt problems, and the ability of governments to cooperate is being tested."
Element of Uncertainty
China's efforts to restrain credit growth and the upcoming UK election are also introducing an element of uncertainty into the markets that does not readily allow corporate boards to have conviction in their decision making, Cole-Fontayn says.
The recapitalization of the financial sector around the world, and ongoing consolidation and asset realignment in the telecommunications industry, could result in new DR programs, Cole-Fontayn says. Corporate transactions, including mergers and acquisitions, will lead to the need for capital to be raised, he says.
Meanwhile, the number of unsponsored American depositary receipt (ADR) programs, which are created in response to investor demand without the direct involvement of the issuer, continues to grow. Of the more than 900 unsponsored ADR programs introduced since October 2008, when the US Securities and Exchange Commission simplified the process of gaining an exemption from registration, about 220 are actively traded.
Opportunities for foreign investment in frontier markets are also growing. Vietnam and Mongolia have done a lot of work to improve the infrastructure of their capital markets, Cole-Fontayn says. "We also feel good about frontier markets in sub-Saharan Africa," he says. "Markets in the region have been looking for information about DR issues, including those in Angola, Mozambique and Kenya."
More Issues In Late Spring
Claudine Gallagher, global head of depositary receipts at J.P. Morgan, says DR capital raisings this year will follow a similar trend to 2009, with relatively moderate activity early in the year and more issues in late spring. "There are a lot of companies that wanted to come to market last year but that decided to wait," she points out.
China likely will remain active, as it has been for the past two years, Gallagher says. "In recent years India has generated a steady flow of new DR programs, and there could be some big deals from Russia this year," she says. There is still a lot of investor interest in …