Issues, Trading of Depositary Receipts Surge
Kraus, James R., American Banker
Depositary receipt programs surged to a record last year, whetting bankers' appetites for this lucrative business.
According to data from banks, the number of outstanding issues climbed 12%, to 1,733, and trading in depositary receipts soared 25% from the 1995 level, to a record $345 billion.
Depositary receipts are used by foreign companies to sell their shares either in the United States or outside their home markets. Banks - overwhelmingly U.S. banks - serve as deposit agents. They handle record keeping, settle trades, transfer stock, and pay dividends.
Foreign companies also raised $19.5 billion in fresh capital by selling shares through depositary receipt programs, up 62% from 1995 and just below the peak $19.7 billion raised in 1994.
Judging by the bullish forecasts at banks, new issues and trading in depositary receipts should climb sharply again this year.
"Our pipeline indicates market interest is still very strong," said James P. Donovan, managing director for depositary receipts at Citicorp.
"Depositary receipts are one of the fastest-growing businesses at the bank," said Kenneth A. Lopian, senior vice president at Bank of New York. "More countries are looking to raise money, and more investors are looking for countries to invest in."
Depositary receipts fall into two main categories: American depositary receipts, or ADRs, which are listed on U.S. stock exchanges and are usually publicly traded, and global depositary receipts, or GDRs, which are usually listed on the London and Luxembourg stock exchanges. GDRs are mainly sold privately in the United States under the Securities and Exchange Commission's rule 144a.
They can be used either as a substitute for outstanding shares, which are bought up in the market and then "deposited" in banks, or for new shares issued to raise fresh capital.
Both ADRS and GDRS are usually denominated in dollars; they can gain or lose value when the underlying home-country currency fluctuates against the dollar.
ADRs were first launched by J.P. Morgan & Co. in 1927; GDRs, in 1990. But the market for them did not really gain steam until the 1990s, when capital markets began to globalize. Today, three banking companies - Bank of New York Co., Citicorp, and Morgan - dominate the business.
Bank of New York reported that by midyear 1996 it had run 57% of the 996 "sponsored," or formal, full-fledged ADR and GDR programs. Citicorp had done 24%; Morgan, slightly more than 17%; and others, slightly more than 1%.
Bankers noted that the rapid development of free market economies around the world and the sharp increase in companies competing for fresh capital were the main spurs to fast growth of depositary receipts.
"Who would have thought three years ago that companies from countries like Croatia and Russia would be looking to use depositary programs?" Mr. Lopian asked.
Foreign banks were among the biggest users of depositary receipts last year, with 31 programs. …