Tapping Western Markets: The Number of Arab Companies Issuing American Depositary Receipts (ADRs) May Double by 2010, as Firms Seek the Prestige and Funding Abilities of International Capital Markets

By Martin, Josh | The Middle East, June 2004 | Go to article overview

Tapping Western Markets: The Number of Arab Companies Issuing American Depositary Receipts (ADRs) May Double by 2010, as Firms Seek the Prestige and Funding Abilities of International Capital Markets


Martin, Josh, The Middle East


FROM CASABLANCA TO DUBAI, PRIVATE Arab companies are taking a new look at the revitalised ADR market, in which foreign companies can raise funds and list shares on US stock markets. Market analysts in New York and London say there are about 20 companies now actively pursuing listing, with another 20 which could have the potential to list before the end of the decade. This could more than double the present number of Arab-based ADRs.

The temptation to list is great, because of the three-fold benefits to such companies. ADRs allow companies to raise capital in overseas equity markets; the approval process also gives the issuing company an easier run at tapping overseas capital markets; and the ADR listing inevitably boosts the issuing company's prestige (and share price) in its home market.

The growing Arab corporate interest in ADRs reflects the increasingly global outlook of the Arab business community. They are turning to an investment instrument with a rich history.

American Depositary Receipts were first used after World War I, as a means for European companies to raise badly needed cash. Later, they were used to help fuel the spectacular growth enjoyed by Latin and Southeast Asian companies in the decades following World War II.

In an ADR, the issuing companies reserves a block of its shares, against which Depositary Receipts (DR) are issued and sold in foreign (i.e. US) stuck markets. They come in several varieties (some of which are known as "Reg-S", "Level I", and "Reg 144-A" listings), depending on what kind of" fund raising a company will engage in, and what if any public share trading will occur.

Although ADRs are by far the single most popular variety (reflecting the size and prestige of American capital and equity markets), there are currently three other DR markets: London, Singapore and Tokyo.

Listing in London does have some advantages. "European markets are much more familiar with Arab company names," says Nofal Barbar, executive VP and Regional Manager (North America) for The Arab Bank. "Regulations in London may be the same as in New York, but the application process is easier, and listing is less costly."

Of course, Barbar adds, there is a trade off: "A listing in New York is still so prestigious. And by global standards, US markets are deep and wide; the capital pool is seemingly endless."

Nevertheless, politically sensitive Arab companies may well prefer seeking a non-US based funding source.

Jean Francois Seznec, a well respected analyst of Gulf banking and financial markets, and now a member of Columbia University's Middle East Institute, believes those political considerations may have to be paramount for the foreseeable future. "I have never seen US Arab relations at such a low ebb and suffused with so much hatred," he recently observed. "American policies towards the Arab world are so intensely disliked in the Gulf at this time that it would be the kiss of death for any company to float [ADR] shares to attract US capital."

Seznec suggests there are viable alternatives. He says companies in the Gulf have major pools of capital to turn to, which would be significantly more accessible if local governments would liberalise corporate registration and open domestic financial markets.

Arab companies also retain the more politically acceptable option of turning to the DR markets in London, Singapore or Tokyo. Listing in those markets would also allow companies from dollar-driven oil economies to engage in a currency play, raising funds in euros or yen instead of dollars. In doing so, it could also allow them to avoid being tainted as "pro-American".

"Saudi companies may seek funding in London or Singapore markets," says one banking expert familiar with the kindom's unique economic set-up. "However, the Saudi central bank (SAMA) may permit more listings on the local stock market before that is necessary. …

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