"Asia remains a very attractive market for ADRs [American Depositary Receipts],” says Citibank’s global head of Depositary Receipt Services, Kurt Schneiber. Citi is one of three firms that dominate the ADR business – the other two being JP Morgan and Bank of New York.
Schneiber, whose experience in Asia has included a stint in India, says that last year was the best ever for ADR growth. Capital raised using ADRs reached $30 billion, up 38% over 1999. Trading volume in ADRs also surged 64% to $1.1 trillion.
US investors hold $1.7 trillion of foreign equities and 42% of that is in ADR format. That’s up from 20% a mere 10 years ago. However, he points out that while there are 2,000 ADR programmes, the top 100 make up 90% of the trading volume.
In non-Japan Asia, there are only two ADRs that make it into the top 25 by trading volume. These are Chartered Semiconductor of Singapore ($9.4 billion of trading volume in 2000) and TSMC of Taiwan ($15.5 billion).
Interestingly TSMC saw more turnover than Deutsche Telekom and Chartered more than Unilever.
Schneiber says the key markets in Asia – from the perspective of setting up ADR programmes – remain Korea, Taiwan, Singapore, Hong Kong and of course, China.
He says two things will drive further growth in Asia. “Firstly, there's a continued requirement for government’s to privatize, in particular in Korea and in China. And secondly, there's an increasing demand for capital from technology firms – and by that I don’t mean dotcoms. These firms need a diverse capital base.”
One of the main advantages of an ADR is that it allows an Asian company to tap into a broader US investor base, beyond the top 20 or so large US institutional investors.
Citi has a commanding 80% market share in ADRs from Taiwan and also Korea. In China, it has been involved in some of the biggest deals – for example, running the ADR programme for Sinopec and Legend.
Schneiber estimates that Citi has won the mandate to run around 60% of the biggest ADR programmes and that’s how he likes it. Running an ADR programme is basically a volume game, he says. The most lucrative ADR programmes are the ones with the highest trading volumes.
It is therefore in his interest to promote good investor relations between the companies that issue ADRs and US fund managers. That’s because those companies that have the most proactive investor relations are more likely to have higher trading volumes and also to see the least flow back of shares to the local market.
The latter is the ultimate disaster for the ADR administrator, as it leads to a smaller and smaller float of ADRs since the stock which flows back to the local market is normally cancelled from the ADR programme.
In some cases – such as in Korea – well over 50% of the shares have flown back, and in one case 100% did – thus rendering the ADR programme obsolete.
The other problem with flowback is that it will also tend to exacerbate the trend for the ADR to trade at a premium to the local stock – thanks to a supply and demand imbalance.
Regulations can make problems worse, although Schneiber says the regulators are starting to take on board some good advice. In Korea, for example, a regulation existed that prevented a cancelled ADR (ie one that flowed back to Korea) from being reissued, thus condemning the ADR programme to a progressively smaller and smaller float.
However, this rule has just been changed, and will allow the reissuance of ADRs up to the original float. So if the ADR programme consists of 10 billion shares, and 2 billion flowed back in the first year, and then an American investor went into the Korean market and bought 2 billion shares, they could then tender these to Citi (if it managed the ADR programme) and they could be converted back into ADRs.
If the ADR was trading at a premium to the local stock, it would obviously be in the interest of an arbitrageur to do this, and make a profit when the ordinary stock is converted into the more expensive ADR. The actions of such arbitrageurs would have the positive effect of eliminating premiums.
Schneiber is in Hong Kong at the moment to attend an IR seminar with about 40 companies. He is very keen to promote corporate governance and says Citi has internal counsels who advise companies (for whom it issues ADRs) on best practice, and tells them what US investors expect.
Citi also provides the companies with accurate data on which fund managers hold its stock and which investors hold stock in comparable companies.
But he reckons Citi’s greatest competitive advantage vis-a-vis its rivals JP Morgan and Bank of New York is its connection with Salomon Smith Barney. Uniquely among the three ADR providers, Salomon has access to 11,500 brokers and these, says Schneiber, can help issuers find incremental investors even after the IPO has been launched and the lead managers have moved on to chase the next deal.
“No one else in our industry has this capability. So we see this as an area where we can uniquely add value,” he says.
