You know what they say: the best laid plans of mice and men and all that. Take euro depositary receipts. The inception of the European single currency had paved the way for this new breed of DR, and mice and men the world over agreed that it would alter the region’s investment landscape forever and for the better.
The chief depositary banks were blatantly confident of the appeal of euro-denominated DRs. Citibank went out on a limb, coupling with the Paris Bourse to set up a euro DR (which it trademarked) that, it said, would provide issuers with ‘a gateway to the benefits of the Euroland.’ The Bank of New York, likewise, was happy to shout about the benefits of its EDRs – every release on the subject was saddled with the strap-line, ‘EDRs – An Opportunity for Issuers and Investors’.
The reality has been slightly different. Citibank’s euro DR product hasn’t had any takers as yet; the Bank of New York has successfully established just one issue while Deutsche Bank (owner of Bankers Trust) is the runaway winner with two. That adds up to a grand total of, drum roll, please…three issues.
So what went wrong? Citibank admits it came up against a barrage of indifference from issuers. ‘We actually conducted an analysis to see what interest there was,’ says Christian Starck, Citibank’s director of product management. ‘It didn’t unearth much enthusiasm. In a nutshell, based on that scan, we’re not actively trying to sell euro depositary receipt programs to European issuers right now. Or at least we’re not pushing it in a full-blown way. We want issuers to be fully committed.’
Certainly viable
That surely raises questions about the inherent value of the euro DR. Starck however considers euro-denominated DRs to be worthwhile. ‘It’s certainly a viable product,’ he says, ‘because there is still not one single Europe. If you wanted to gain access to all the different companies, you’d have to go through all the different bourses. The euro DR bypasses this process. It offers instant pan-European diversification.’
Chris Sturdy, managing director of issuer services at the Bank of New York, considers that the euro-denominated depositary receipt offers investors an opportune way to exploit the single currency. ‘The logic is relatively straight forward,’ he says. ‘Portfolio managers in euroland might want to invest in emerging markets. There’s a risk in that already. Why add a currency risk too?’
Unfortunately, these compelling arguments have so far fallen on deaf ears. Starck attempts to explain the euro DR’s slightly inert progress among issuers. ‘I think that integration in Europe – such as the linking of different exchanges – is muddying the waters a little,’ he argues. ‘There’s so much movement in Europe at the moment that issuers are unsure about committing to something like this. Timing is an issue too. By late summer, euro DR thinking turned into Let me get my issue out before the Y2K crunch thinking. I think issuers are now just biding their time.’
And this public lack of interest can be damaging. ‘I think I’m right in saying that there hasn’t been a Citibank euro DR issue yet,’ offers one observer. ‘That sends out a pretty strong message to all issuers.’
Shooting from the hip
Patrick Colle, head of ADR Europe for JP Morgan, knows what is happening in the euro-denominated depositary receipt market. ‘The short answer,’ he says, ‘is – not much.’ And he is fairly scathing of his competition too. He alleges that the Citibank euro DR product is not a real euro depositary receipt at all. ‘Essentially it’s a French depositary receipt,’ says Colle. ‘It is listed exclusively on the Paris Bourse and it is also cleared in France. It just happens to be denominated in euros because there’s not really any French currency trading. We don’t understand the appeal of this French depositary receipt. Firstly, because it’s too restrictive – choosing a depositary bank is not an option, you have to list in Paris and you have to clear in France. And the listing requirements on the Paris Bourse are much more stringent than they are in, say, Belgium or London. That will obviously discourage issuers, especially those from the emerging markets.
‘Secondly, and more importantly, there is the GDR. It’s just more flexible. Like the euro DR, it is aimed at emerging market issuers, it’s dollar-based and it gives the issuer the choice of stock exchange and clearing house. By definition, that means you attract the broadest range of investors. A real euro depositary receipt is – or should be – listed in euros and be like a GDR except for the currency difference. The French euro DR is probably a good idea in a few cases, such as where the issuer has extensive business in France and where a French listing just makes more sense but apart from that…’
Standing firm
Kurt Schneiber, Citibank’s managing director of depositary receipts, won’t accept Colle’s criticisms. ‘What you have is GDRs, ADRs and euro DRs and they’re completely different,’ he says. ‘The GDR is a private placement. It’s not a registered security and it can only be traded by European institutional investors and US qualified institutional buyers (QIBs). The ADR can be traded by all investors and is a public listing. We created the euro DR to mirror the ADR in Europe. So you can’t really compare euro DRs with GDRs. As for the Paris Bourse, it’s on the forefront of creating an electronic exchange; it’s a pioneer in creating multiple trading points outside of France.’
Schneiber isn’t alone in his sympathy toward the euro-denominated depositary receipt. Richard Wallin, vice president for emerging markets at the Bank of New York, argues that there is a smidgen of interest from issuers. ‘We’ve set up one program for BorsodChem [the Hungarian PVC and plastics manufacturer],’ he says. ‘We do have documentation in place for a few others but we’ve pulled back. We just didn’t want to disappoint them or waste their time.’
‘They can work as a side-by-side program with a GDR,’ reckons Mike Hughes, global head of DRs at Deutsche Bank. ‘It could be a secondary issue, on the back of an IPO. We have developed a structure that allows this and allows fungibility. We’d have a GDR program with two tranches. A dollar one for US QIBs and a euro tranche.’
Hughes adds that he has also perceived a positive attitude among issuers. ‘There is an appetite for euro DRs from issuers. And in the last three to four months we have seen an increase in investment banks coming to us to see how to structure IPOs that are denominated in euros. But we need to see interest from investors, too.’
So where is this investor interest? Why is EDR activity so slow? What’s the story? ‘I think slow is a little optimistic,’ laughs Sturdy. ‘There really doesn’t seem to have been much fund management interest at all. We keep in touch with syndicates and the equity capital markets and we really have not seen any interest.’
Playing hard to get
Investors are seemingly sticking to what they know. ‘There are three main reasons for this,’ suggests Sturdy. ‘One, the euro has been weak. Two, the dollar is king. And three, it will take some time for fund managers to adjust and redenominate their portfolios. These are important factors. Every single cross-border offering that I can remember has been in dollars.’ Colle concurs with this view: ‘It just so happens that the US dollar is the trading currency,’ he says.
Hughes is more optimistic. ‘The structure of euro DRs certainly hasn’t failed,’ he states. ‘It’s just that investors are happy investing in dollars. It’s going to be a tough job to get them to move away from a system that they’re comfortable with. It’ll be a while before they shift to buying in euros.’
Lack of liquidity is another problem. For all the bold claims of the depositary banks that liquidity would be boosted through an enlarged market, Colle says that the opposite is true. ‘Liquidity is certainly an issue,’ he explains. ‘As soon as you introduce one more DR category, you reduce liquidity in all the other categories. What you want is just one pool. And, again, GDRs come to mind…’
The protagonists themselves don’t seem unduly worried, though. Laszlo Kovacs, chairman and chief executive of BorsodChem, explains that his company’s DR program is a multi-currency version. ‘We wished to provide an opportunity for investors who prefer their investment in DRs denominated in euros,’ he says. ‘We’re pleased with the present course of the shares, since the prices better express the company’s performance than those six to twelve months earlier.’
Things can only get better
‘I think we’ll see a growing demand for euro depositary receipts from issuers,’ says Hughes. ‘That’s because they’re shareholder-friendly and they offer shareholder value. But we still need to see a shift among people in the investment community.’
Starck is more confident, arguing, ‘I think that the appeal of euro DRs is intuitive and inherent. Did we expect greater interest? Yes we did. Do we still expect interest in the future? Yes we do.’ Schneiber agrees: ‘We are hopeful,’ he says. ‘We’re ready to roll.’
Does this mean things are going to perk up from the euro DR market? ‘I can’t answer that,’ insists Sturdy. The Bank of New York, he says, didn’t get carried away with EDR giddiness initially and it won’t now. ‘We thought We don’t know. We’re not smart enough to know if it’ll take off. I remember Bankers Trust [now Deutsche Bank] cobbled together a euro DR program before the euro had even been launched. They were trying to steal a march on their competitors but it’s turned out to be actually quite supine. I think it’s quite amusing.’
