IR magazine

Singapore's dark pool spices up regional competition

The Singapore Stock Exchange (SGX) announced a dark pool trading platform in alliance with Chi-X back in August, but it has only recently attracted outspoken criticism. The chairman of the Hong Kong stock exchange, Ronald Arculli, has condemned the move in a speech to the territory’s Foreign Correspondents’ Club. Dark pools, he said, present a ‘systematic risk’ to global finance, but should we read ‘global finance’ to mean Hong Kong’s share of regional trading?

Dark pools enable the trading of large amounts of shares in secret to reduce market impact. Arculli fears they will lead to a two-tiered market, where dark-pool participants have exclusive and beneficial access to information on trades. Many critics also accuse dark pool trading of being too lightly regulated.

SGX are keen to defend their new dark pool, known as Chi-East. Carolyn Lim of SGX stresses that the platform is adequately regulated. As for two tiers, it will be ‘a win for regional markets because it will boost overall liquidity, attract new players and improve the trading environment,’ she tells IR magazine in an email.

However, some evidence suggests critics have over exaggerated the market importance of dark pools. A recent study by the Financial Services Authority suggests that only 1.25 percent of trading in Europe takes place under these conditions. Before regulatory questions arise, Chi-East’s popularity with regional investors and traders will determine whether Arculli’s fears are justified.

Robin Froggatt-Smith
IR magazine

Little progress on SME funding

The UK chancellor Alistair Darling was forced to revisit his stimulus package in front of the Treasury Select Committee this afternoon. The focus of the inquiry was public finance but bank lending to the small and medium-sized enterprise (SME) sector once again came under scrutiny.

Under examination from every direction, he summarized his pre-budget report with the memorable phrase: ‘Caution comes from uncertainty, I cannot stress that too much, because uncertainty leads to caution.’ ‘Are you being cautious or pessimistic?’ was one response.

The committee may have thought the discussion had returned to earth when Darling identified the ‘real economy’ as the SME sector. Unfortunately, however, the question of access to capital for these companies proved elusive. The committee was at a loss even to confirm whether there was a problem or not, since banks say that they are lending to the SME sector, while SMEs claim the opposite.

Robin Froggatt-Smith
IR magazine

DR update: trends for 2010 and a look back at 2009

It’s back - IR magazine’s DR update. Given that the year is almost up, this blog will take a look back over some market changes from 2009, and speculate how they will play out in 2010, with comment from JP Morgan’s global head of DRs Claudine Gallagher.

Brazil’s ADR tax
Emerging markets have taken the lion’s share of equity investment over the past year, causing some developing countries to worry about inflation and currency appreciation.

To combat this, Brazil brought in a 2 percent tax on foreign currency inflows in October of this year, followed by a 1.5 percent tax on the ADR programs of all Brazilian companies the next month. Banco Santander’s Brazil unit narrowly avoided the tax when raising $8 bn through an IPO in early October, $4.5 bn of which was in DR form.

At the time the moves shocked market participants, but the DR market appears to have come through unscathed. ‘What we’re seeing is issuance and cancellations at the same levels as before the 1.5 percent ADR tax and the 2 percent foreign exchange tax, so we’re practically back to normal,’ says Gallagher.

‘There’s still volume out there and a lot of interest in Brazil. From what I’m hearing, we’ll see some big programs coming out of Brazil over the course of the next year,’ she adds.

Russia’s regulatory shuffle
Russia has also seen regulatory changes affecting the DR market. In its case, the authorities want to protect local liquidity. Russia already has rules restricting the amount of shares a domestic company can offer abroad to 30 percent. This limit is being lowered from January 2010 to 25 percent for companies on quotation list ‘A’ of the Russia stock exchange, and 15 percent for those on quotation list ‘B’, according to JP Morgan.

But other changes will help boost the market for DRs by Russian companies. The changes also allow Russian issuers to list DRs without raising new capital – previously this was not permitted – allowing them to set up level 1 programs in the US on the over-the-counter market.

‘There is a lot of investor interest for some of those large companies in Russia that maybe don’t need to raise capital now but may want to in the future,’ says Gallagher. ‘Russia has been largely absent from the DR market this year but I think it will be back in 2010.’

Continuation of US delistings
Gallagher sees a continuation of the delistings from the main stock market that began a couple of years ago when the SEC made it easier for overseas companies to deregister.

She points out, though, that most continue to be traded on the over-the-counter market OTCQX. ‘Companies are making the move for two reasons,’ she explains. ‘One, they have very small trading volumes and it didn’t pay to remain on the main exchange; or two, they have good brand awareness and investor interest and can continue to see strong trading and liquidity even though they’re on the OTCQX market.’

End-of-year review
JP Morgan has produced a report reviewing the DR market during 2009. Some of the main findings are listed below:

-DR trading was slightly lower in 2009 than 2008, with 124 bn DR shares traded in the 11 months to November this year, compared to 131 bn during the same period last year.

-There were 91 new ADR and GDR programs in the first 11 months of 2009, taking the total number of sponsored programs to 2,122.

-Capital raising through ADRs and GDRs to November increased by 68 percent on last year, raising around $8 bn, with the majority of that through ADRs listed in New York.

-The top five IPO issuers up to November in 2009 were:

Banco Santander – $4.507 bn
Shanda Games – $1.043 bn
Shin Kong Financial Holdings – $375 mn
Epistar – $351 mn
KGI Securities Co – $286 mn

Tim Human
IR magazine

UK pre-Budget report: investing in youth but not sustained growth

The UK chancellor of the exchequer, Alistair Darling, announced the Labour party’s final pre-Budget report (PBR) today, in advance of 2010’s general election.

The PBR quotes the Rowlands Growth Capital Review, published last month, and its proposal for a new fund to attract more investors to small and medium-sized enterprises (SMEs). However, further investment in UK businesses has become a tired political stick in the lead up to the anticipated election and the PBR fails to address the issue of longer term recovery for SMEs.

Darling told the House of Commons:

‘As recovery gets underway, we need to ensure that SMEs get the credit they need, and we are working with the banks to make sure that happens. We are also working to secure a contribution from the major banks towards a £500 mn Growth Capital Fund, which will invest specifically in small business. We will announce further details shortly.’

‘Through the Innovation Investment Fund (UKIIF) and the Carbon Trust's Venture Capital scheme, we will support at least £160 mn of public and private investment in low carbon projects,’ he added.

But just last month the delegates of the UK’s Alternative Investment Market told Lord Drayson, science minister in the Department of Business, Innovation and Skills, that the UKIIF was inadequate. The minister heard how it and similar schemes such as the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) do not help companies attract private capital for their ‘industrialization’, growth beyond startup but before an initial public offering.  This is a particular concern for the sectors targeted by the UKIIF – which Darling’s PBR named as ‘life sciences, clean technologies, digital and advanced manufacturing’. These industries have struggled to find the capital for growth and recovery in 2009. In Germany, solar technology has ended up being imported from China.

Buried in the text of the PBR there is some hope, however:

4.25 Alongside this Pre-Budget Report the Government has published draft legislation on these changes, allowing time to consult before the legislation is introduced in Finance Bill 2010. Introducing these changes will provide certainty to the venture capital industry, investors and small companies over the future of these important schemes. To ensure the EIS and VCT schemes continue to be targeted on companies affected by the equity gap, the Government will also begin immediate discussions with industry to ensure the effectiveness of the current thresholds for qualifying companies, based on draft legislation also published alongside this Pre-Budget Report.

UK businesses must be hoping that financial policy moves past political slanging after the election so government aid will focus upon supporting growth where growth is due.  

Robin Froggatt-Smith
IR magazine

Inn-fighting continues at M&B

Mitchells & Butlers (M&B), the company which owns UK restaurant Harvester and pub chains All Bar One and O’Neill’s, has fought back against a severe case of unruly investors, issuing the following statement:

‘The Panel on Takeovers and Mergers has been approached and a submission will be made imminently regarding the cumulative evidence that a number of shareholders have been seeking to gain control of the Board and of the Company to advance the interests of a small group of shareholders at the expense of others.’

If the Panel accepts the claims, the accused will have to launch a takeover bid, cut their holdings, or face disciplinary action. Suspected of acting in cohorts are Joe Lewis - M&B’s largest shareholder with a 23 percent stake through his Piedmont investment vehicle - and second-largest holder Elpida, which is headed by Irish horse racing billionaires and associates of Lewis, John Magnier and John McManus.

A recap of recent events:

-At the end of November, Lewis blocked the appointment of Archie Norman, (now chairman of ITV), Simon Laffin, and an unnamed other for the role of chairman.

-Yesterday, M&B appointed Laffin as chairman despite previous objections. In M&B’s press release, Hall pointedly says, ‘Simon was one of the shortlisted candidates for the Chairmanship.’

-Richard McGuire, Lewis’ nomination to the board back in July, has been advised to step down from the board of directors. In addition, another Piedmont representative, Douglas McMahon, has been asked to leave the board, as were Ray MacSharry and Denis Jackson. Former Irish finance minister McSharry is perhaps out of favour thanks to his hibernian associations. This series of confrontations has destroyed any illusion of corporate stability for the chain.

So how have investors reacted to the fiasco? On November 26, M&B’s share price fell with chairman Drummand Hall’s announcement that he would be stepping down. Lewis’ intervention was greeted with indifference by investors, but with news of the subsequent appeal to the Takeover Panel shares have risen and jumped again by 8 percent today.

Given Lewis’ track record, it is unlikely that this will be the last we hear of him in advance of M&B’s AGM at the end of January.

Robin Froggatt-Smith
IR magazine