Depositary Receipts Prove Resilient in 2009 According to J.P. Morgan Year in Review Report

Despite declining economic and market conditions in the first half of 2009, depositary receipts (DRs) proved resilient particularly in the second half of the year, according to the annual J.P. Morgan year-end industry report.

In the first 11 months of 2009, IPO capital raising through DRs increased 68% over the prior year, with 22 new issuers raising almost $8 billion, as compared to 30 issuers raising $4.7 billion in 2008. Additionally, DR liquidity maintained close to the unprecedented levels witnessed in 2008, only marginally declining from 131 billion DR shares traded globally during the first 11 months of 2008 compared to 124 billion DRs traded during the same period in 2009.

"Key DR markets demonstrated remarkable resilience in a year of high volatility as they recovered to almost pre-crisis levels,” said Claudine Gallagher, global head of J.P. Morgan’s DR business. "As markets recovered in the second half, DR capital raising and issuance picked up significantly to close the year well over 2008 levels, led by Brazil, China, India and Taiwan. Unanticipated events aside, we expect DR capital raising, trading and investments to grow at a steady pace in 2010.”

Other key findings from J.P. Morgan’s "DR Market - 2009 Year in Review” report include:

• 80 issuers from 28 countries created 91 new DR programs during the first 11 months of 2009, increasing the total number of sponsored DR programs to 2,122.
• New York-listed ADRs (American Depositary Receipts) dominated DR IPO capital raising, driven by issuers from Brazil and China. Banco Santander Brasil (Brazil) and Shanda Games (China) were the landmark IPO deals in 2009, raising $4.5 billion and $1 billion respectively. Banco Santander Brasil was the largest ever DR IPO offering from Brazil, while Shanda Games was the largest ever DR single listed IPO offering from China. (J.P. Morgan serves as depositary on both these landmark programs.)
• 33 existing issuers from across the globe raised $9.2 billion in the U.S., Europe or Asia through follow-on offerings in the first 11 months of 2009, as compared to $10 billion raised by 25 issuers in 2008.
• Depositary receipts continue to be a popular alternative for investors to gain exposure to foreign issuers. J.P. Morgan estimates the total global investment in DRs at approximately $1.2 trillion as of November 2009.

Rapid Increase in Unsponsored DR Programs

The rapid increase in the number of unsponsored ADR programs continued in 2009 as global depositary banks continued to create them apace, often without issuer consent or meaningful investor demand. These programs, many of which are illiquid, have been created under exemptions that the SEC has permitted since it amended Rule 12g3-2(b) in October 2008. Of note, more than 50 unsponsored programs, predominantly for issuers from Japan, have been terminated at the request of issuers who had not given their consent to these depositary banks. J.P. Morgan still maintains a collaborative, consultative and transparent approach with issuers when establishing unsponsored programs.

Themes to Watch in 2010

IPO Capital Raising: Steady increase in capital raising via DRs as issuers from emerging markets continue to tap the US, Western Europe, and now Asia, to meet their capital requirements.

• APAC is expected to be the most active region, with China and India leading DR capital raising, followed by Taiwan. Newer markets, such as Vietnam, are expected to emerge in the next 18-24 month period.
• Russia is expected to lead DR capital raising in EMEA, although new regulations may set tight limits on capital raising from that market. Depending on financial market strength and stability, some deal flow may also be seen from new or nascent DR markets in the Middle East, Commonwealth of Independent States (excluding Russia) and Sub-Saharan Africa.
• In Latin America, Brazil and Colombia, and to a lesser extent Mexico, may see DR-related capital raising.

J.P. Morgan also expects DR IPO offerings to continue to be a popular route for private equity firms to exit their investments, especially in high growth sectors, such as e-commerce, biotech, alternative energy, internet and consumer sectors in emerging markets.

Local DRs: Continued evolution of "local DR” structures (DRs that are structured to tap growing capital bases in emerging markets such as Hong Kong, Taiwan and India). Hong Kong’s HKEx, for example, now gives foreign issuers access to Asian investors through Hong Kong DRs. The first Indian DR is expected to launch in the first-half of next year, while more issuers from China and Singapore are expected to list on the Taiwan Stock Exchange using TDRs.

New OTC Level 1 Markets: New Russian regulation makes it possible for Russian companies to establish Level 1 OTC ADR programs. The previous regulation required Russian issuers to raise capital when circulating their DRs offshore. Additionally, the government of India is examining a proposal to amend its existing rules governing ADRs to allow Indian companies easier access to the U.S. market through Level 1 programs.

Alternative Trading Venues: Emergence of alternative trading venues for DRs as they are made eligible to trade in electronic markets. While this will lead to increased liquidity, primary exchanges like NYSE, NASDAQ and London will continue to dominate overall liquidity.

J.P. Morgan Continues DR Industry Leadership

Having created the first-ever ADR in 1927, J.P. Morgan continued its industry innovation and leadership in 2009. For example, with 77% market share, and three of the five largest IPOs of 2009 - including the two landmark deals from Brazil (Banco Santander Brasil) and China (Shanda Games) - J.P. Morgan dominated DR IPO capital raising in 2009. J.P. Morgan also led total DR capital raising, with 41% market share in 2009.

Programs managed by J.P. Morgan, on average, continue to trade at higher values and be significantly more liquid than those of other depositary banks. Average trading value of J.P. Morgan programs at $3.4 billion and average trading volume per program at 153 million is significantly more than other depositaries.

Additional 2009 highlights include:

• J.P. Morgan was appointed as successor depositary bank for United Microelectronics Corporation (UMC) in Taiwan, TNT in the Netherlands, and Tsingtao Brewery in China. UMC is Taiwan’s second-largest DR program, and was the largest 2009 program switch in Asia.
• J.P. Morgan’s clients, including Sony, Novartis, Nissan Motor, Korea Electric Power Corp, AstraZeneca, ASML, E.ON and Allianz renewed or extended their contracts in 2009.
• J.P. Morgan introduced a patent-pending solution, I&C Lock, which allows broker-dealers to purchase a contract that establishes a fixed rate for future DR issuance or cancellation without any obligation to execute the transaction. Brokers buy I&C Lock contracts to fix DR issuance and cancellation costs, reducing uncertainty and risk which is expected to foster liquidity in the DR market.
• J.P. Morgan now serves as sponsor for all Vanguard Exchange Traded Funds (ETFs) that are listed on the international segment of the Mexican Stock Exchange, Bolsa Mexicana de Valores (BMV).

For market information on DRs and international equities go to J.P. Morgan’s award-winning web site www.adr.com. For more information on J.P. Morgan’s DR services please visit http://www.jpmorgan.com/visit/adr.

About JPMorgan Chase & Co.

JPMorgan Chase & Co. (NYSE: JPM), is a leading global financial services firm with assets of $2.0 trillion and operations in more than 60 countries. The firm is a leader in investment banking, financial services for consumers, small business and commercial banking, financial transaction processing, asset management, and private equity. A component of the Dow Jones Industrial Average, JPMorgan Chase & Co. serves millions of consumers in the United States and many of the world’s most prominent corporate, institutional and government clients under its J.P. Morgan and Chase brands. Information about JPMorgan Chase & Co. is available at www.jpmorganchase.com.