DEPOSITARY RECEIPTS: Depositaries fuel Mena investments

Depositary receipts are attracting investors to the Middle East, finds Nick Fitzpatrick, who talks to Tarek Elrefai, of BNY Mellon.

Certain Mena companies have turned to the depositary receipt market in recent years to raise finance from international investors.

Depositary receipts, which are listed on US and European stock exchanges, allow investors to invest in the equities and bonds of foreign companies without the associated risks of investing in the issuer’s local stock exchanges where problems with clearing and settlement and other structural risks affect confidence.

One example from the Middle East is Global Investment House, a Kuwait-based fund manager and investment bank, which raised money through depositary receipts listed in London. Allianz Global Investors is a key owner of Global’s London depositary receipts. Each depositary receipt represents five of Global’s ordinary shares, which are listed in Kuwait, Dubai and Bahrain.

Headline figures for the depositary receipts market for the first half of this year threw out some record numbers. There were 78.1bn American and global depositary receipts, valued at $1.84trn (€1.43trn), in the first half of 2010. Trading volume increased by 8.3%.

The figures are from The Bank of New York Mellon, which is the world’s largest depositary for American and global depositary receipts. It is also the major player in the Mena region, providing depositary services for Global Investment House’s depositary programme, which with it’s $1.15bn issuance in 2008, was the largest by a Middle Eastern company and the first by a Kuwaiti firm.

Tarek Elrefai, head of BNY Mellon’s global client management in the Middle East & Africa, and who is based in Dubai, says that with a 67% market share globally in depositary receipts, and a 100% market share in Egypt, and 85% in the markets of the Levant countries that include Jordan and Lebanon, the Gulf region is now also growing as a depositary receipts market while Saudi Arabian and other firms look to raise foreign capital.

“We are putting a lot of infrastructure for the depositary receipt business in Saudi Arabia and other member states of the Gulf Co-operation Council (GCC), like Dubai,” says Elrefai. “We believe that the GCC will attract significant foreign investors in the not-so-distant future.”

He says this because at the last Middle East annual conference held by BNY Mellon, 250 people attended with a significant amount of companies there looking at depositary receipt programmes. BNY Mellon has held these conferences in the Middle East for 13 years and the last one took place in Istanbul.

Raising interest
Part of the depositary function, or part of its infrastructural development, for BNY Mellon is bringing companies together with potential investors. One reason Global Investment House chose BNY Mellon was because the Kuwaiti company felt the US bank could give its depositary receipts the visibility they needed.

Although this marketing role is like a capital introduction exercise, Elrefai says: “We provide information, not investment banking.”

He adds: “We can tell clients in different businesses which fund managers in the US and Europe invest in their sector.”

This proved helpful with one of BNY Mellon’s Egyptian clients, Commercial International Bank (CIB), which delisted from the Abu Dhabi and Kuwait stock exchanges in July, though kept its Egyptian listing.

Elrefai says: “In late 2009, an American fund manager wanted to sell its 20% stake in the depositary receipt programme of Commercial International Bank, an Egyptian bank and client of ours. This would have been terrible if the depositary receipts had gone to the retail market.

“However, we were able to find a UK institutional investor to buy a 10% stake in CIB.”

More recently, Elrefai hosted a group of fund managers, called the Russell Group 2010, in March this year as they made a trip to Saudi Arabia and the United Arab Emirates to look at investment opportunities. According to Elrefai, this group travels to different locations each year to scope international investment.

“The Russell Group went to petro-chemicals companies and other firms in the region to meet with senior management and hopefully they will begin to invest in these companies in the near future,” says Elrefai.

“The fund managers want to understand more about custody arrangements and other market technicalities on top of the investment opportunities that are here. We had some of our clients do follow-up meetings with them in Saudi Arabia.”

According to Elrefai, a large Canadian pension fund was among the group.

Elrefai says the investment interest shown by the Russell Group, which he says had around $12trn in assets under management, centred on depositary receipts.

“They are looking for opportunities in depositary receipts rather than in the more ordinary markets because the investment managers want the companies to be listed on an intermediary exchange so that the exit opportunities are more available. They know the risks of investing locally.”

Corporate governance
A depositary provider like BNY Mellon also has a role to play in facilitating communications between companies on one side, and investors and potential investors on the other. A challenge here is to square up the expectations surrounding transparency and corporate governance between a conservative Mena issuer on one hand, and a rigorous Western investment manager on the other.

“Part of our job is to help issuers communicate better with foreign investors,” says Elrefai.

The information available about Global Investment House on its website far exceeds what many combined investment banks and asset managers would voluntarily provide.

The fact is that many corporate governance issues in Europe and North America – such as combined chairman and chief executive roles, or director holdings – have not quite got the same sense of importance in the Mena region, at least not yet.

But corporate governance standards are changing for the better, says Elrefai.

“The big engine behind the change in attitudes to corporate governance is the second generation,” he says.

Despite the apparently positive outlook for this segment of the capital markets, and despite their recent record numbers, the BNY Mellon ADR Index, which tracks American-listed depositary receipts, or ADRs, was down 15.76% in the first half of the year, and down 9.92% compared to June 30, 2009.  In total, 30 of the 35 depositary receipt country indices were lower year to date.

However, the number of available depositary receipt programmes rose to 3,214 at June 30, 2010, from 3,096 a year ago, largely due to recent changes in US regulations that made it easier to establish over-the-counter-traded ADR programs.  

In the first half of 2010, issuers from nine countries completed 44 new primary and follow-on depositary receipt offerings, raising more than $4.1bn. India and China together accounted for 34 of the offerings and more than half the total value raised.

Michael Cole-Fontayn, chief executive officer of BNY Mellon’s depositary receipts business, said recently:  “Depositary receipts continue to prove their popularity as a cross-border investment vehicle during an uncertain global financial recovery.

“The market has seen a significant increase in trading value and volume, as well as continued growth in new programmes.  Much of this was spurred by high-growth markets and their attractive growth prospects.”

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