Financial Markets and Treasury Services Sector
October 20, 2009
Access to US Capital Markets: Opportunities in
Challenging Times
Presented by
Nuno da Silva, DR Head of Latin America &
Jason Paltrowitz, DR Head of Global Capital Markets
Section I.
BNY Mellon Overview
2
Highlights of BNY Mellon
$20.2 trillion assets under custody
and administration
$928 billion in assets
under management
$11 trillion in outstanding
debt serviced
Strong financial ratings: S&P AA-;
Moody’s Aa2; Fitch AA-
As of December 31, 2008
3
Why is BNY Mellon Hosting this Seminar?
BNY Mellon knows the Level I ADR Universe and is fully committed to its
growth and development
Level I Sponsored
Program Market Share
Others
23%
523 Clients
77%
BNY Mellon’s Experience with Level I Programs is Unparalleled
4
Section II.
Demystifying ADRs
5
6
Myth 1:
“ADRs are no longer necessary,
because investors can invest in my
local shares easily”
7
The importance of ADRs continues to grow
ADR Trading Volume US$ Billions
US$ 4,4 trillion
In 2008, investment and trading volume of ADRs reached record levels.
8
Myth 2:
“Level I ADRs are only for small,
unknown companies”
9
Many of the largest companies in the world have Level I ADR programs
Level I ADR programs traded in the OTC market:
10
Nestle
Largest food company in the world
Volkswagen
Largest auto company in Europe
BASF
Largest chemical company in the world
Gazprom
Largest Oil & Gas company in the world
Usiminas
Largest steel producer in Latin America
JBS
Largest meet producer in the world
Wal-Mart de Mexico
Largest retail company
Myth 3:
“A Level I ADR program will enhance the
visibility of our company in the US”
There is a key distinction bewteen “access” and “visibility”
Access and Visibility:
ADR Characteristics
Investor Relations
DTC Settlement
Settlement in US$
Quoted in US$
Real time quotations
Familiar brokerage and clearing
Broker conferences
Roadshows
Media relations/advertising
OTCQX
Investor events
ADR
PROVIDES
ACCESS
12
IR
INCREASES
+
VISIBILITY
Myth 4:
“There is limited demand for Level I
ADRs, so it’s not worth the effort”
13
New Level I ADR Programs received over US$ 1 Billion
No. of ADR Programs
3,078 programs
More than
US$ 1 billion
in 1Q09
Through 1Q09, 700 new Level I ADR programs attracted over US$ 1 billion
14
Myth 5:
“An ADR program will split the liquidity
of my shares”
15
Empirical evidence shows that ADRs increase share liquidity
The average positive impact to liquidity of local shares is 48%:
Hundreds of ADR programs were analyzed between 1980-2007
16
Section III.
ADR Overview
17
Depositary Receipt Market Highlights
• At year-end more than 2,900 DR programs from 80 countries were available to
investors, up from 2,200 a year ago
• 2008’s trading value reached $4.4
Annual DR Trading
trillion in U.S. and non U.S.-listed
U.S.-Listed
programs as well as OTC-traded DRs,
4,800
120
exceeding the record set in 2007
4,000
100
80
• Issuers from 16 countries completed 41
3,200
2,400
60
initial public offerings (IPOs) and follow-
1,600
40
800
20
on offerings in 2008
Value ($bb)
Volume (bb)
0
0
'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08
In 2008, DR program trading and investment reached record levels.
18
Depositary Receipt Market History
2,500
2008 – Unprecedented Volatility
Regulatory change
Unsponsored growth – more DR supply
2003 to 2007 - Markets Rebound and Grow
2,000
Falling U.S. dollar, low interest rates drive DR prices
Total Number of DR Programs
International equity markets outperform and U.S. investors follow – rise of BRICs
Depositary banks increasingly act as consultants
2001 to 2002 –Markets Consolidate
1,500
Technology bubble implosion
Corporate Governance reemphasis (Enron, WorldCom)
Greater demands placed on a depositary banks
1990 to 2000 – Explosive Growth in the DR Market
1,000
Structural changes, decimalization and tighter spreads
DRs used in privatizations, capital raisings and M&A
Depositary role largely administrative and operational
500
1930 to 1989 –DR Market largely unsponsored and investor driven
Depositary role totally administrative
and operational
0
1930
'35
'40
'45
'50
Source: BNY Mellon; December 31, 2008
19
'55
'60
'65
'70
'75
'80
'85
'90
'95
'00
2007
2008
BNY Mellon Depositary Receipt
Leader in All Relevant Markets
•63% of Global DR Programs
•74% of Latin American DR Programs
•78% of Brazil DR Programs
28
273
18
10
46
276
241
All DR Programs
From Brazil
All DR Programs
From Latin America
All DR Programs
Global
1331
206
BNY Mellon
20
J.P. Morgan
Citibank
102
Deutsche Bank
Section IV.
Introduction to Level I ADR Programs
21
What Are Depositary Receipts?
Negotiable securities issued by a depositary bank that represent a
non-U.S. company's publicly traded equity.
American
DRs
G lobal
• Can be used to list on stock exchanges around the world
• Can be used to raise capital (IPOs or follow-on offerings)
• Can be adapted to meet specific marketing needs
22
Creating Depositary Receipts from Local Market
Instructs Brazilian
Broker to Purchase
Ordinary Shares
U.S. Broker
DTCC Delivers DRs to Broker’s
Custodian or Euroclear /
Clearstream credits participants
account
Depositary Creates DRs and
Delivers to Depositary Trust
& Clearing Corporation or
Euroclear / Clearstream
23
Brazilian Broker
T+3
Settlement
Broker Purchases
Ordinary Shares on
Bovespa and Delivers
Ordinary Shares to Local
Custodian
Local Custodian Takes Delivery
and Confirms to Depositary
Depositary Receipt Benefits
Issuer Benefits
 Access deep international capital markets
 Increase share valuation and liquidity
 Diversify and broaden shareholder base
 Prepare for future acquisitions
 Express international commitment
 Heighten profile for products and services
24
Depositary Receipt Benefits
Investor Benefits
 Access over 2,000 DRs from 76 countries
 Obtain quotes in U.S. dollars
 Receive dividends in U.S. dollars
 Clear and settle in globally recognized systems
 Overcome foreign investment restrictions
 Access improved information in English
25
DRs Provide Access to Deep Capital Markets
Level II & III DR
Level I DR (OTC)
144A/RegS
-
Bovespa
- Brazilian Institutions
- Brazilian Retail
- US and European Institutions
with presence in Brazil
Qualified U.S.
Institutional Buyers
(QIBs – with over
$100 MM in assets)
and European
investors with
clearing and
settlement
structures in Brazil
-
(SEC Registered & Listed)
US and European
Institutions that
don’t have clearing
and settlement
structures in Brazil
but seek Brazilian
equity opportunities
- Mutual/Pension
Funds that are
required to hold U.S.
DTC securities
- Sophisticated
US Retail
Investors
DRs will increase access to institutional and retail investors
26
- US and European
Institutional Investors
that prefer SECregistered securities
and familiar trading
and settlement
structures
- Mutual/Pension
Funds that are
required to hold
U.S. securities
- US Retail
Investors
Introduction - Level I DR Program
Level I DRs:
 Level I DR programs offer an easy method for reaching U.S. investors.
 Level I DRs trade in the “Over the Counter” (OTC) market with prices published in Pink
Sheets and on some exchanges outside the U.S.
 A sponsored Level I program allows non-U.S. issuers to realize the benefits of issuing a U.S.
publicly traded security without changing their reporting processes.
In order to establish a Level I program, the Company does NOT have to:
• Comply with the Sarbanes-Oxley Act.
• Reconcile to U.S. GAAP
• Change its current financial and disclosure reporting procedures. (U.S. SEC disclosures)
• Issue any new shares for the DR program
Size of the Market:
 The sponsored Level I DR market is the fastest-growing segment of the DR business. Of the
approximately 2,100 DR programs available more than 700 of these are Level I facilities.
27
OTC Depositary Receipts Enhance Valuation and Liquidity
Oxford Metrica, an Oxford University-based independent strategic advisor, conducted
research on the DR marketplace which provided “empirical insight on the extent of
the value and additional liquidity generated by DRs, and the key drivers of this
process.”
The research resulted in a few conclusions relating to “Sponsored” OTC DRs:
• After year one, OTC DRs raised ordinary share
liquidity by 23% on average
• OTC DRs increased ordinary share price by an
average of 10%
• BNY Mellon, both by its dominance and
advantage in driving both issuer and
investor value and increasing the liquidity
of local shares
Value Added - Level I
10.0
8.0
6.0
4.0
2.0
0.0
Value Reaction
(%)
scope of services, holds a comparative
-20 0
20 40 60 80 100 120 140 160 180 200 220 240 260
Event Trading Days
Value Added - Level I
28
Level I DR Program
Many of the world’s largest and most respected companies currently have sponsored
Level I ADR programs trading in the U.S. OTC market.
International Level I Issuers
Latin American Level I Issuers
Country
Heineken
Volkswagen
Wal-Mart de Mexico
Mexico
BNP Paribas
Lukoil
Grupo Modelo
Mexico
SAB Miller
Mitsubishi Corp.
JBS
Brazil
Deutsche Lufthansa
Nestle
Cyrela Brazil Realty
Brazil
Foster's
Nintendo
Usiminas
Brazil
Gazprom
Societe Generale
MMX
Brazil
adidas
BASF
Inv. Aguas Metropolitanas (IAM)
Chile
Rolls Royce
Roche
Sivensa
Venezuela
L’Oreal
BAE Systems
Cementos Lima
Peru
Air China
Olympus
Banco Hipotecario
Argentina
Zurich Financial Serv
Air France-KLM
ISA
Colombia
Clarins
El Al Israel Airlines Ltd.
Graña y Montero - GyM
Peru
Sega-Sammy
Antofagasta
Sare Holding
Mexico
Hipermarc
Chile
Sharp
29
Establishment – Level I DR Program
Benefits:
 Simple to establish and maintain
 No cost to the Issuer
 Minimal reporting
 No additional disclosure
 Access to broad and diversified shareholder base – European and U.S.
institutions as well as U.S. retail
 Cost efficiencies for investors
 Creates shareholder value
30
Establishment – Level I DR Program
Establishing a Level I DR Program is Easy:
A Level I DR program is easy to establish and does not require extensive management time
or commitment. To establish a sponsored Level I DR program, three principal documents
are required:
 12g3-2(b) Information Exemption - Is the principal provision used by Foreign Private
Issuers to claim exemption from U.S. registration and reporting requirements.
Deposit Agreement - A standard service contract between the Company, BNY Mellon and
DR holders which details the responsibilities of each party.
Form F-6 - This is a simple registration statement of DRs which includes the signatures of
a majority of the Company's board of directors.
The Level I establishment process takes approximately 6 weeks, and can be
achieved at no cost to the issuer.
31
Establishment Timetable – Level I DR Program
Level I ADR Establishment Timetable
Item
Appoint depositary bank and U.S. lawyers
Confirm automatic 12g3-2(b) exemption
compliance
Prepare DR certificates, obtain CUSIP
number, request DTC eligibility
Prepare / submit Deposit Agreement and
form F-6 to SEC
NASD and DTC are notified of effectiveness
DR trading commences
Broker notifications are sent and posted on
Internet
Distribute announcements to financial
community and media
Week
Party Responsible
1 2 3
Issuer
Issuer & Lawyers
Depositary, Issuer &
Lawyers
Depositary, Issuer &
Lawyers
Depositary
Brokers, Investors
Depositary
Depositary
* Above timetable refers to US portion of documentation. CVM approval generally takes 30 days
32
Section V.
Market Demand for Level I ADRs
33
Opportunity to Diversify Shareholder Base & Improve Liquidity
 Expanded universe of potential “target” investors
 Additional investment by larger institutions
 Smaller, long-term institutional investors
 Managed Account Managers
 Retail Investors
 Improve Liquidity
 More investors potentially entering and exiting your stock/DR
 Arbitrage traders – provide base of increased liquidity
34
U.S. Investor Tiers
Access to the Full DR Investment Market
Tier
Equity AUM
1
2
3
4
DR Opportunity
> $50b
$11.0 trillion invested by 77 U.S. firms.
$2.2 trillion international of which $358 billion is in DRs
(16% DRs).
$10b - $50b
$3.6 trillion managed by 163 U.S. firms.
$628 billion international of which $173 billion is in DRs
(28% DRs).
$1b - $10b
$2.2 trillion managed by 727 U.S. firms.
$378 billion international of which $98 billion is in DRs
(26% DRs).
< $1b
$628 billion managed by 3,126 U.S. firms.
$76 billion international of which $26 billion is in DRs
(34% DRs).
 Larger institutions tend to invest in both the home market and DRs.
 Many smaller institutions use DRs to diversify internationally.
35
Largest DR Holders and Level 1 Investments
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Institution Name
Capital World Investors (U.S.)
Fisher Asset Management, LLC
Tradewinds Global Investors, LLC
Thornburg Investment Management, Inc.
Barrow Hanley Mewhinney & Strauss, Inc.
Barclays Global Investors N.A.
Wellington Management Company, LLP
Van Kampen Asset Management
The Vanguard Group, Inc.
BlackRock Investment Management (U.K.), LTD
Fidelity Management & Research Company
Delaware Investments
Aberdeen Asset Management, LTD (U.K.)
Brandes Investment Partners, LLC
Templeton Asset Management, LTD
AllianceBernstein, L.P. (U.S.)
Dodge & Cox
Schroder Investment Management (UK), LTD
Lazard Asset Management, LLC (U.S.)
Capital Research Global Investors (U.S.)
ADR Value ($mm)
15,938.5
7,959.6
8,293.3
4,632.9
2,345.7
13,576.8
13,670.6
4,093.4
2,005.0
4,868.1
20,109.2
4,080.0
2,829.8
10,081.4
2,413.2
10,909.5
17,327.2
1,985.2
5,622.2
12,158.2
OTC Value ($mm) Share (%)
2,252.7
14.1
2,202.4
27.7
2,033.3
24.5
1,347.7
29.1
1,212.2
51.7
1,005.7
7.4
804.4
5.9
697.1
17.0
676.3
33.7
576.7
11.8
560.2
2.8
544.1
13.3
511.0
18.1
487.2
4.8
444.7
18.4
441.7
4.0
429.6
2.5
318.7
16.1
251.7
4.5
248.7
2.0
 Of the top 50 institutions holding DRs, almost $18.5 billion is
invested in Level I companies.
36
Access to Additional Investor Segments
 Retail (individual investors):
 At the end of 2008, U.S. retail investors held $5.5 trillion in equities, either
directly or through mutual funds.
 Of this, $2.7 trillion were foreign equities.
 Managed Accounts:
 At the end of 1Q09, managed accounts assets under management was $675.5
billion
 Some of the largest managed accounts institutions include:





37
Legg Mason ($32.7 billion AUM)
Blackrock, Inc. ($29.4 billion AUM)
Allianz Global Investors ($24 billion AUM)
Lord Abbett & Co. ($13.1 billion AUM)
Brandes Investment Partners ($12.4 billion AUM)
Investor Demand for International Level I Programs
 Director of Managed Accounts ($2.2 billion AUM):
“Yes, we would like to see more OTC DR programs. Anything that expands
the universe of DRs is a good thing.”
 Portfolio Manager ($26.6 billion AUM):
“We would like to see more OTC DRs. We manage private accounts, which in
some cases are ADR-only, and in that case it would be beneficial to have
them.”
 Trader ($7.4 billion AUM):
“We would like to see OTC or listed DRs because it would benefit accounts
that cannot hold ordinary shares. Also, it would help our non-QIB accounts
with increased investment choices.”
38
Sell-side
 Sell-side will not initiate coverage because of a Level I program.
 However, the sell-side can look positively upon the establishment of a
Level I because of the liquidity upside:
 When an issuer recently started trading OTC, UBS published a report
stating that the move to an OTC DR program is a “positive for the stock as it
should improve the liquidity of the shares.”
39
BNY Mellon Support
 25 global capital market experts (largest team in the industry)
 Located in major business centers of New York, London and Hong Kong
 Specialists help you navigate the capital markets efficiently and effectively




40
Increase exposure and liquidity of Issuer DR Programs
Provide global best practice Investor Relations advisory services
Leverage sell-side and buy-side intelligence and contacts
Produce Investor Relations/Thought Leadership studies