Despite low takeup: SMIC, MPIC to proceed with ADR program

MANILA, Philippines -  Two of the country’s top conglomerates are optimistic in terms of attracting US-based stock market investors through American Depositary Receipts (ADRs).

Mall and banking powerhouse SM Investments Corp. (SMIC) is looking at around $50 million worth of shares to be traded in US shores while infrastructure conglomerate Metro Pacific Investments Corp. (MPIC) will retain its ADR program, executives said.

“For our ADR, we have an arrangement with The Bank of New York (BNY) Mellon. They will issue their own securities backed up by SMIC shares,” said SMIC chief finance officer Jose Sio.

“We are looking at a volume of around $40-50 million,” Sio said, referring to the underlying SMIC shares.

Late last month, the investment holding firm of Philippines’ richest man Henry Sy launched its ADR program to broaden its investor base.

One SMIC ADR represents 0.5 common share of SMIC.

BNY Mellon, as its depositary,  is the world’s largest depositary for ADRs and Global Depositary Receipts.

ADRs are negotiable securities issued by a US depositary bank to domestic buyers as a substitute for direct ownership of publicly traded stocks of a foreign company. Depositary receipts can be traded on US trading venues like the New York Stock Exchange, Nasdaq and over-the-counter markets.

Sio said that despite the recent correction in the stock market, SMIC is confident of stirring up foreign investors’ interest.

“Nothing is wrong with the economy and the company. It’s just the behavior of the world market,” Sio said, adding that the Philippines is due for another credit ratings upgrade.

The Philippines’ credit rating, which was earlier tagged as investment grade by Standard & Poor’s Ratings Services and Fitch Ratings, was put by Moody’s Investment Service “on review for upgrade.”

MPIC, for its part, will retain its ADR program despite “negligible” takeup of US investors, said MPIC chief finance officer David Nicol.

“We’ll stick with the program. It does not cost us anything but right now there’s nothing much happening,” Nicol said.

“Most of [US investors] already got a way of doing it without having to go through ADR,” Nicol said, adding that many US investors turned to fund managers that can directly invest into MPIC.

In August last year, the local arm of Hong Kong-based conglomerate First Pacific Co. Ltd. launched its ADR program. The company targeted a maximum of 100 million underlying MPIC shares.

Despite low takeup, Nicol said many foreign funds and US investors are “very interested in infrastructure investments in the Philippines.”

ADRs allow US investors to trade MPIC and SMIC shares in their own time zone and to settle their transactions locally. It also offers convenience and reduces currency risk on the part of the investors which buy ADRs in US dollars.

Moving forward, both conglomerates will weigh market sentiments before upgrading their ADR programs from the current “Level 1,” which a non-capital raising activity but allows foreign firms’ shares to be traded in the US.

“We will see first what will be the performance of this ADR,” Sio said when asked about an upgrade to “Level 2” and “Level 3.”

“No need to change it now. It hasn’t done anything positive yet,” Nicol said.

“Level 2” and “Level 3” programs require US Securities and Exchange Commission registration and compliance with US Generally Accepted Accounting Principles.

“Level 2” depositary receipts are exchange-listed securities but will not involve raising new capital while “Level 3” programs allows foreign firms to secure fresh funds.

“There will be more stringent requirements. We’ll see its worth to be on that level,” Sio said.

For Nicol, upgrading its ADR will require compliance costs and regulatory burden.

Other Philippine firms that already took advantage of ADRs include telecommunications giant Philippine Long Distance Telephone Co., holding firm Aboitiz Equity Ventures Inc. and the country’s oldest conglomerate Ayala Corp.