New issuance of American depositary receipts is being hit hard at the moment, despite growing demand from investors in the product. JPMorgan research estimates that total ADR capitalization at the end of last year accounted for $650 billion, around 33% of all foreign investment in the US, yet new ADR issues from Europe have virtually dried up. Plentiful issuance from Europe, the Middle East and Africa, which accounted for 60% of supply in 2000 in the era of large-scale transatlantic acquisitions funded through stock such as Vodafone’s acquisition of AirTouch and large IPOs is now a thing of the past. Many major European corporates already have a US listing but others are being put off by uncertain equity market conditions and new regulatory burdens with the introduction of the Sarbanes-Oxley Act.
?There has been a real slowdown as most large European companies already have a listing in New York or an over-the-counter ADR programme,? says Patrick Colle, global head of ADRs at JPMorgan Institutional Trust Services. ?Of the potential issuers, for Latin American and Asian companies that need to raise capital in the US, a US listing makes perfect sense and Sarbanes-Oxley doesn’t appear to be such a negative. But those companies that are uncertain may be put off entirely by uncertainty in the equity market right now and the extra disclosure requirements of Sarbanes-Oxley, particularly if they are already listed or are planning to be listed on a European exchange.?
Colle gives the example of Germany’s Postbank and France’s Pages Jaunes, two of the biggest IPOs Europe has seen for a number of years, where neither company decided to opt for a US listing. Lastminute.com is planning to withdraw its Nasdaq listing and cancel its ADRs in August, saying in a release that new US regulations for companies having a US listing are ?becoming increasingly complex, onerous and costly?.
For the first six months of the year, IPOs from Asian companies have been providing over 90% of new ADR supply, mostly from Chinese and Taiwanese issuers and technology and media companies. Chinese semiconductor firm SMIC’s $1.7 billion dual offering, raising nearly $1 billion in ADRs, the largest offering from an Asian company to date, is a good example.
But even these companies are now staying out of the market. Despite a strong first half and a pipeline full of Chinese companies looking at a listing in New York with an ADR offering, Colle says many of these plans have been put on ice, with some being postponed to 2005, as the market has witnessed Asian IPOs that have been done postponed, made smaller or priced lower. Dutch/Korean electronic goods manufacturer LG Philips had to cut its planned IPO in half to $1 billion in July, it had to be priced at the bottom of the range and its shares still traded down after launch. ?There are a number of deals that are ready to go but aren’t being launched because of the lack of direction in the equities market and low trading volumes,? Colle says.
Demand still growing
Yet demand for ADRs is growing despite the fall-off in new supply, particularly from wrap accounts aimed at US retail investors. According to research by JPMorgan, assets committed to wrap accounts are growing on average 22% a year and are now valued at around $935 billion (see chart). ADRs are a popular investment vehicle with wrap account managers as they are dollar- denominated and traded with dividends paid in dollars, and are therefore ideally suited to retail investors.
Colle says one bright spot has been a revival in new ADR issues from Latin American companies, which had slowed substantially last year. He gives the example of Mexican building company Homex, which last month did a $140 million capital raising on the New York Stock Exchange with two-thirds of this taken up in ADRs.
However, Colle hopes that there could be a boost to the ADR new issue market from all regions, if there is a revival in ADR-funded acquisitions within the next 12 months.
?Right now,? he says, ?cash is cheap and stock valuations are lower, so ADRs are a less attractive acquisition currency. If valuations bounce up and cash financing becomes more expensive, that could change. We may not see deals of the size of Vodafone/Airouch funded with ADRs, but we are likely to see more.?
