June 1992


Easy money

By GC Team  June 01, 1992 4:00 AM GMT

Easy Money

Do you know how much your ADRs are costing you?

Shannon Engels

Investors bought and sold $138 billion worth of American Depositary Receipts in 1991. Every one of these trades generated a shower of fees and hidden revenues for the banks that serve as depositories for ADRs: issuance fees, cancellation fees, pre-releasing income, float revenues, and foreign exchange windfalls. What's this all add up to? One large US broker paid Bank of New York alone $35,000 in issuance and cancellation fees in one month in one stock, Glaxo Holdings, earlier this year. Another medium-sized brokerage firm estimates it pays the five leading depository banks $150,000 in fees each month. It adds up to a bonanza-sources indicate that the industry made in excess of $150 million in revenues in 1991 from ADRs-and it's a bill that's footed by the end-investor.

Much of the debate-occasionally surfacing in the press-about whether institutions should be purchasing ADRs or the underlying foreign security is fatuous. The issue is not whether to buy ADRs or the foreign securities themselves-many US institutions can't buy foreign stocks by law, or are simply disinclined to deal with a global custodian and the attendant complications that foreign investing entails. The issue is simply this: the three leading depository banks-JP Morgan, Bank of New York and Citibank, -make phenomenal profits, wholly borne by the end-investor, from providing a relatively straightforward and riskless service.

How do they get away with it? For a start, the costs to the end-investor are hidden. The broker incorporates the depository's issuance fee when it makes a market in the ADR; likewise, the trading price of a listed ADR reflects the depository's fees. Issuance fees range between $.03 to $.05 per share and can be negotiated down somewhat, depending on the ADR's liquidity-thus, buying and creating 10,000 shares of Allied Lyons, which trades at around $11.25 will oblige a brokerage firm to rack up some $500 in issuance fees: and bearing in mind that commission costs, over which the Street and institutional investors have been doing battle over for the last decade, range between $0.05 to $0.08, the issuance fee is substantial indeed.

Virtually everyone-barring the banks themselves-agrees the issuance fees are too high. "Fees are too steep, and on dividends the hidden charges are outrageous," says John Brimelow, director of international equities at BV Capital. Others are slightly more forgiving."The depositories definitely have the upper hand, though some are prepared to negotiate fees down," says Michael Lewis, president of STANY (Stock Traders Association of New York) International and head of international trading for SG Warburg. "But the bottom line is that brokers have to accept their fees if they want to do business."

Cancellation fees-incurred when the ADR is reverted back to the ordinary share form and returned to the home market-are also precipitous. Bankers Trust, which, with other banks, sometimes waives issuance fees in order to get business, reportedly makes up for its apparent largesse when ADRs are cancelled, charging as much as $0.10 per share in cancellation fees.