Dual challenge: listing options
In the good old days, multiple listings were something of a no-brainer: massive upside with minimal downside. The only quandary was deciding which pools of capital – New York, London, continental Europe – to tap. Not so today.
‘Raising capital is now a privilege rather than a right,’ says Anthony Moro, head of emerging markets’ depositary receipts (DRs) at the Bank of New York Mellon (BONY Mellon). ‘Gone are the days when emerging market firms can go on the road with a 25-year-old investment banker and a tiny prospectus.’
But it’s not just the downturn that has affected the listings market. Regulations have also had a notable impact. First, the SEC made it easier for US listed firms to de-list by amending the so-called Hotel California clause. Secondly, the regulator went on to amend SEC 12G, enabling depositary banks to set up unsponsored American DR programs.
BONY Mellon recently disclosed that it had issued $1 bn in unsponsored depositary receipts during the first quarter of 2009, leading to hundreds of new over-the-counter ADRs. The unsponsored issue has not been without controversy, however, and while the depositary banks say they are just responding to investor demand for non-US securities, some companies have expressed irritation at not being consulted.
Lawyers have also stressed the possible legal fallout from the programs, warning of potential class action suits filed by investors companies didn’t even know existed. The depositary banks have been quick to point out that firms can take control of their programs if they have concerns, however.
‘Companies can either contact the depositary bank and ask it to close down the ADR, or they can set up a sponsored program,’ explains Claudine Gallagher, head of securities at JPMorgan.
Gallagher denies firms are being forced to set up sponsored programs to help line the pockets of the DR banks: ‘The Level 1 programs are not that lucrative for the DR banks and only a few firms have set up sponsored Level 1 programs as a result of the proliferation of unsponsored ones.’
As well as the hundreds of unsponsored DR programs, some firms have moved their secondary listings from the NYSE to OTC in order to save on costly regulatory compliance. Firms such as BASF are also said to be getting 76 percent of the liquidity they were previously getting on the NYSE.
OTC QX, the premium platform offered by OTC Pink Sheets, has seen 12 new listings so far in 2009, giving it a total of 59 issuers. German chip maker Infineon Technologies was one company to recently make the move. It de-listed from the NYSE to concentrate on its Frankfurt listing while maintaining a Level 1 ADR security on OTC QX.
‘Some people were declaring the demise of the DR but we are now seeing bigger firms with bigger programs and stronger IR teams moving to the OTC, and it doesn’t seem to have harmed them,’ Gallagher says. ‘The only downside is that some funds are not allowed to invest in OTC firms.’
‘There has been a huge movement to the OTC markets from firms that no longer want to be SEC-compliant,’ adds Andrew Kyzyk, head of business development at Pink OTC Markets. ‘Firms such as Imperial Tobacco and Air France have found the cost of being SEC-registered runs into millions of dollars.’
Gallagher concedes that some firms could be reassessing their multiple listings in the current climate. ‘Obviously, I am a big supporter of DRs but it has to make sense for the company,’ she observes. ‘If it is unable to tell its equity story in the market where the security is listed, we might see this happening.’
But smaller companies with less well-known brands may have to remain on the established exchanges, regardless of the compliance cost, in order to retain liquidity.
‘The more liquid and regulated you are in the new world order, the more benefit there will be when the market picks up,’ Moro points out. ‘Large firms on the US stock exchanges will do well and London will always have a role because of Russia, but for the fringe markets things could be different.’
The price isn’t right
Arbitraging should, in theory, lead to equal stock price valuations across markets, but it does not always work out like that. ‘Russia has put a number of non-domestic ownership limitations on ‘strategic companies’, a term it has used fairly broadly,’ says Anthony Moro, head of emerging markets’ depositary receipts (DRs) at the Bank of New York Mellon. ‘There is also a maximum allowable limit in Korea.’
Dual stock pricing discrepancies between markets are also commonplace in markets where currencies are not exchangeable, such as China. This has led to a premium on A-share listings.
Commentators have speculated that Thomson Reuters, a firm whose London stock frequently trades at a discount of up to 20 percent to its Canadian listing, may reconsider its arrangement in the future.
‘Discrepancies happen in countries where traders don’t have the ability to freely cross borders,’ Moro explains. ‘In the UK you’ve got stamp duty reserve tax; that puts an artificial barrier in place, making one security more attractive than the other.’