May 31st, 2011 by Tom Minney
Many foreign investors have investments in Africa but hold them in international custody in London or New York and perhaps wish to trade them on international securities markets such as London Stock Exchange or New York’s NYSE Euronext. They would choose to hold their equities in the form of Depositary Receipts, usually known as “American” (ADRs) if issued in the US, “Global” (GDRs) in London and there are DRs in several other countries including South Africa (SADRs).
The idea is that shares listed on an international exchange are transferred to a strong financial institution, who then issues a DR security which can be more easily traded on an international exchange or over-the-counter (OTC) market. BNY Mellon dominates the field but other issuers include JP Morgan Chase, Citi and Deutsche Bank. The total value of DRs traded in 2010 worldwide was $3.5 trillion, up 30% on 2009, and 89% of this trading was in the US.
Michael Cole-Fontayn, CEO of BNY Mellon Depositary Receipts (www.bnymellon.com), explained to African Capital Markets News that when institutional investors request, either for a capital raising or for more trading, BNY Mellon approaches the company and other stakeholders to set up a DR programme, usually under English or New York law. The details of the new DR security, including its currency, can be adapted to suit the international investors.
BNY Mellon holds the underlying security in the local market through a custodian, usually Standard Bank, while the newly issued DR clears and settles through the usual international clearing houses. An investor who has bought the shares in the local market can also approach BNY Mellon to convert them into DRs, which are often cheaper to own and easier to trade and settle.
When an investor holding a DR wishes to sell, he may first look for an international buyer for the DR. If not, his broker can find a buyer in the home market, then BNY Mellon would cancel the DR and deliver the shares for settlement in the local market. This can be done overnight if there is a time difference, but cancellation was suspended for Egyptian DRs when the Egyptian Exchange closed for two months in January-March 2011.
BNY Mellon currently offers DRs in shares in South African, Nigerian and Egyptian companies and offers indices based on the DRs. South Africa’s Anglogold Ashanti raised $705m through issuing DRs in New York in September 2010. Egypt’s Orascom Construction and Remco Tourism Villages created DR programmes for the US OTC markets, while Orascom Telecom traded $1.8bn of DRs on the LSE’s International Order Book (IOB) market. Four African companies – Malawi’s Press Corp, two Nigerian Banks and media house Naspers of South Africa – have GDRs listed on the LSE’s Main/Professional Securities Market.
Mary Gormley, Vice President at BNY Mellon Depositary Receipts, said that one big advantage was the speed of clearing and settlement and reduced costs. For instance, Oando plc, listed on the Nigerian Stock Exchange then cross-listed on the JSE in 2005. Movements between share registers could take 40 days, while equivalent changes using the DR system would be much quicker. She believes the DR programme will grow, with growth businesses in Kenya and Ghana interested and Senegal, Togo and Zimbabwe also considering it: “DRs come out of a need for capital raising.”
May 30th, 2010 by Tom Minney
Standard Chartered Bank in Kenya (www.standardchartered.com/ke/en/) is to issue KSh 2.5 billion ($30.2 million) in new shares in order to buy the custody business of Barclays Bank of Kenya, according to a Reuters report. Chief Executive Officer Richard Etemesi said the total cost of the transaction was KSh 1.9 billion ($22.7 million) and other proceeds will go into expanding the bank’s ordinary business. The new shares will raise Standard Chartered’s authorised share capital to KSh 1.78 billion from 1.365 billion.
On 27 April the bank announced that it had agreed to acquire the African custody business from Barclays Bank PLC. The acquisition is subject to certain regulatory and other approvals, and is expected to be completed this year. The African custody business forms a key part of Standard Chartered’s widening network of of international custodian services, alongside existing capability in Asia and the Middle East. The Africa-wide acquisition adds direct custody capabilities in 8 African markets (Botswana, Ghana, Kenya, Mauritius, Tanzania, Uganda, Zambia and Zimbabwe) and indirect capabilities in a further 8 markets (Egypt, Cote d’Ivoire, Malawi, Morocco, Namibia, Nigeria, Tunisia and South Africa) through a network of third-party sub-custodians via an operations hub in Mauritius.
Commenting on the deal Karen Fawcett, Group Head of Transaction Banking at Standard Chartered, said: “We are very pleased to have secured the acquisition of Barclays’ African Custody business. This deal will enable Standard Chartered to rapidly develop our custody capabilities in our core markets across Africa. We are already seeing ongoing demand for regional and international investment services across this region. Standard Chartered remains committed to providing clients with an integrated set of solutions that promote ongoing growth of this industry. With this acquisition, we will enhance our custody offering and continue to gain a strong foothold as core bank to our clients in Africa.”
The new business will strengthen Standard Chartered’s regional product offering for both international and regional businesses, strengthening client relationships, whilst providing an additional source of liquidity to the Group.
The Reuters report cites Etemesi as saying the deal will be particularly important for Asian investors looking for returns in the African market: “One rationale behind the acquisition of the custody business is to give our Asian customers opportunity to invest in African capital markets.” He said revenue from the business should be about KSh 1 billion ($12.5 million) by the end of 2012, from about KSh 600 million currently.
According to the bank’s website, it is the oldest foreign bank in Kenya (established 1911) and has over 1,000 employees, 32 branches and 27% market share. In March the bank announced that it had increased pre-tax profits for the year ending December 2009 by 43% to KSh 6.7 billion. Revenues grew by 22% to KSh 12.4 billion while expenses grew by only 3%; loans and advances to customers grew by 31% to KSh 56.7 bln while customer deposits grew 13% to KSh 86.8 bln. In 2009, the bank invested heavily in technology anticipating that it would be the main driver for business growth in the banking sector in future, including in systems infrastructure and technology-based products and services as well as standardising technology platforms to become more nimble and able to anticipate and respond to the changing business environment.
The rights issue and the acquisition are subject to regulatory approval.