Outlook Improves for Capital Raising Using Depositary Receipts in 2010

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Corporate Finance Focus

Like initial public offerings, the amount of equity capital raised using depositary receipts dried up during the global financial crisis, but there has been a flood of new DR issues in recent months, and companies around the world are expected to make active use of the DR capital market in 20 1 0, market participants say.

Banco Santander (Brasil) holds the record for the world's largest IPO for the year to date, with its $8 bilhon offering in October, which was also the largest ever by a company based in Latin America and the largest offering by any foreign company on a US exchange so far this year. J.P.Morgan is the depositary bank for the Brazilian bank's American depositary receipt (ADR) program.

The Banco Santander (Brasil) IPO, which listed simultaneously in Brazil and the US, was a historic event because of its size, says Claudine Gallagher, global head of depositary receipts at J.P. Morgan. The IPO was the largest in Brazil's history, surpassing the $4.3 bilhon IPO ofVisaNet in June.

Strong Investor Demand

Santander BrasiTs ADRs trade on the New York Stock Exchange, and its common and preferred shares trade on the Sao Paulo Stock Exchange (Bovespa).The bank sold 600 million units, with each unit representing 55 common shares and 50 preferred shares. The offering was increased from an initially planned 525 million units in order to meet strong investor demand.

J.P. Morgan is also the depositary bank for the ADR program of Shanda Games, one of the largest providers of online games in China, with nearly 10 million active accounts. Shanda Games raised $1 billion in its US-only issue on September 23, which was the largest IPO of the year in the US at the time. It was the largestever sole US-listed IPO issued by a China-based company. The shares trade on Nasdaq.

"The $1 billion was more than the company expected to raise," Gallagher says. "If the Banco Santander Brasil and Shanda Games IPOs are good precursors of what lies ahead in 2010, it could be a good year. I am cautiously optimistic," she says.

Will Russia Come Back?

More DR issues are likely from the big emerging markets, including Brazil, India and China, in such sectors as online gaming, healthcare and hospitals, and ordine education, Gallagher says. "Russia has been absent from the market for some time, but it may be positioning itself to come back," she says.

Aluminum producer Rusal is planning an IPO in Hong Kong that could raise $3 billion in the sale of a 10% stake in the company, but the stock issue depends on progress being made in the company's foreign debt restructuring.

Gallagher says J.P. Morgan has received queries from companies in the Middle East and North Africa that may be interested in making DR issues in 20 10. The bank also has established a presence in Nigeria to handle possible future issues.

Brazil in October introduced a 2% transaction tax to discourage foreign buying of its currency in an attempt to prevent the real from rising. DR banks are assessing the new tax, but it could make DRs an extremely attractive alternative for Brazilian issuers.

Michael Cole-Fontayn, chief executive of BNY Mellons depositary receipt division, was in Brazil at the rime the tax was announced. "The tax is a minor frictional cost for investors who are attracted to the undoubted long-term potential of Brazil," he says. The tax likely will be temporary, he adds, but it does make depositary receipts relatively more attractive. DR issuers are more favored, particularly large existing issuers, and they may accelerate issuing plans that had been delayed due to global economic and market conditions, he says.

"Overall, I am looking forward to a much better year for DR capital raising in 2010 than 2009 has proved to be," Cole-Fontayn says. "My optimism is cautious, however, and we need to see how the markets anticipate and deal with the withdrawal of liquidity as government stimulus programs are wound down. …