One might think an off-year for emerging markets would be an off-year for ADRs. Not so, say the 1995 numbers issued by the ADR depositary banks
According to data from Bank of New York, one of three depositaries producing comprehensive statistics, some 10 bn shares worth $278 bn changed hands in 1995, a 37 per cent increase over trading volume and a 12 per cent increase in dollar volume over 1994. Yet total new capital raised amounted to about $12 bn, compared to a record $20 bn in 1994, and the number of new programmes dropped to 203 from 265.'While 1993 and 1994 were dominated by Latin American ADR issuers, 1995 was the year of European transactions,' comments Ken Lopian, senior vice president of depositary receipts at Bank of New York. 'The peso crisis chilled Latin America and had an impact on Asia. But the second half of 1995 saw unprecedented activity, with DR capital raising nearly doubling from the first six months.'
'A number of foreign markets hit road bumps in 1995,' notes Mark Bach, vice president and head of ADR sales at Citibank in New York. 'Some deals were delayed or came out at less favourable than expected pricing. Still, when one looks deeper at the numbers, an astounding growth in ADR issuance through 1994 and a significant roster of blue chips with existing programmes are fuelling liquidity.'
Europe was a driving factor in 1995 new issuance, accounting for 64 per cent of the total capital raised, according to Citibank's statistics. Some 29 per cent came from Asia, a mere 5 per cent from Latin America, and 2 per cent from Africa.
In fact, Europe was the only region from which the number of companies launching new ADRs increased over 1994 levels. The UK was the most active in the region, with 29 companies coming to the US market. Globally, it was followed by Hong Kong (25), South Africa (13), Germany (10) and the Netherlands (9).
Citibank notes that the ongoing American thirst for foreign stocks is expected to resume and continue in the coming years. US investment in international securities grew from $17 bn in 1981 to $307 bn in 1994, and some analysts expect that figure to reach $1 trillion by the year 2000. Bach is bullish for 1996, remarking that it could well be the year of the mega-deal in the ADR market, with Korea, Taiwan and Brazil pegged for significant deal flow.
BoNY notes that around $3.6 bn was raised by Asian depositary receipts issuers in 1995, with over 80 per cent coming from Indonesian, Korean and Taiwanese offerings.
Korean highlights included Samsung Electronics, the world's largest producer of computer memory chips, Korea Electric Power Corporation (Kepco), the state electricity company, and Pohang Iron and Steel (Posco), the world's second largest steel maker, each of which raised $300 mn in DR offerings. Acer Incorporated, the Taiwanese computer manufacturer, raised $221 mn, and Jilin Chemical, the largest diversified chemical company in the Chinese Republic, sold DRs worth $95 mn out of a $185.3 mn issue.
BoNY expects a return of Latin America and Asia to the US market in 1996. 'Emerging markets expectations are improving,' Lopian says. 'Investors will be re-examining where they put their money, and we expect them to work harder overseas in the coming year.' Lopian notes that US investors will be taking a close look at Brazil, Peru and Mexico, in that order. China and India are also being re-evaluated.
Despite an off-year for Latin America, the region still figured strongly in the trading tables. Numbering among the ten most actively traded DRs were Telefonos de Mexico (Telmex), Grupo Televisa and YPF. Brazil's state-owned telecoms company Telebras came out with a Level II New York Stock Exchange listing. Altogether, Brazil raised $283 mn in four DR offerings.
'1995 was a year of testing and transition for emerging markets,' says Jose Garcia-Cantera, director of Latin American equity research at Salomon Brothers. '1996 is going to be a good year, with emerging markets growing and structural changes coming into play. It's a year of consolidation for Mexico and Argentina, transition for Brazil, and business as usual for Chile with 6.5 per cent growth.' Garcia-Cantera eyes Peru's potential. Once ten times the size of Chile's economy, Peru's economy is now around 65 per cent of the size of its neighbour.
BoNY's Lopian adds that regulatory and infrastructure breakthroughs are brightening the outlook for Central Europe. Privatisations moved forward, through Poland's Bank Gdanski and Hungary's OTP Bank, for example; and BoNY acted as depositary for Russia's first DR offering from Mosenergo, an energy company which raised $22.5 mn in a 144A offering. All in all, Lopian expects to see record DR capital raising in 1996, and a trading volume increase of over 30 per cent.
'Poor performance for emerging markets in 1995 can be attributed to outstanding market performance in the US,' comments Peter Duggan, vice president and product manager of DRs at Bankers Trust. 'There is still a lot of interest in overseas securities, but demand was being met by US stock in the past year.' Duggan expects a turnaround in 1996, depending on how the US market performs.
According to Bankers Trust, around 68 per cent of new DR capital was raised in 1995 through public offerings, while 32 per cent was in GDRs or private placements. Meanwhile, new programmes dropped to 160 from 230. Of the 98 capital raising transactions, $7.5 bn was through new programmes while $2.7 bn was raised through secondary offerings, rights offerings, or upgrading of Level I programmes. Of the new offerings, 16 programmes listed on the NYSE, 17 on Nasdaq, 31 through GDRs and 14 through private placements.
Bankers Trust notes that the most active sectors for DR issuance were banking, electricals and electronics, and telecommunications, with 19, 13 and eleven new programmes respectively. Since mid-year, the banking and electronics industries continued their upward trend surpassing telecoms as the most active industry.