RPT: JP Morgan Sees Brazil's Telebras Product Slowed By Fees
By MARGARITA PALATNIK
Dow Jones Newswires
NEW YORK -- Everyone thought that J.P. Morgan & Co. (JPM) had a sure
winner in hand when it launched its basket American depositary receipts on
Brazil's Telecomunicacoes Brasileiras SA, known as RTBs, on Oct. 13.
The RTBs are based on the most liquid instrument trading on the Sao Paulo
stock exchange, representing a 37% weight in the Bovespa index. Moreover,
they offer low fees, and afford easy arbitrage with the underlying security.
Finally, the new instrument comes on the heels of the successful launching of
HOLDRs (TBH), an ADR created by Merrill Lynch (MER) with the Bank of
New York (BK), which represents Telebras ADRs (TBR). Some observers
even predicted that RTBs would cause the demise of HOLDRs.
But a week after listing, and despite much industry praise, RTBs haven't taken
off, and J.P. Morgan is blaming The Bank of New York for the slow start.
Specifically, J.P. Morgan cites the unusually high fees charged by BONY for
cancelling Telebras ADRs into shares in the local market. For thousands of
Telebras ADR holders, the cancellation is a step prior to the conversion into
the local receipts, know as RCTB40s, which in turn can become RTBs.
BONY charges 25 cents per Telebras ADR cancelled, as opposed to a
standard 5 cent fee for most cancelled ADRs.
In the loosely regulated ADR market, BONY is the depositary agent for
Telebras, as well as for HOLDRs, the product that competes with RTBs.
Telebras was privatized on July 29, spun off into 12 units which trade on the
Sao Paulo stock exchange. New York listing for the ADRs of the new
companies - delayed for months - is expected within a few weeks.
J.P. Morgan sees the high Telebras cancellation fee as a deliberate effort by
BONY to impede conversion from HOLDRs into rival RTBs. J.P. Morgan
officials allege that shareholders didn't receive a customary 30-day written
notice about the fee increase.
"There was no notice to registered holders about any change in fees, so the
question is, 'is this a way to artificially increase a hurdle to exit TBR or TBH, to
get into RTB?' said J.P. Morgan vice president and ADR product manager
Eduard Van Raay. "We have seen no evidence to suggest contractual basis for
the charge,"
Traders surveyed said they didn't recall a written notice, but remembered being
informed by telephone.
BONY won't comment on the fees, but it has previously contended that the
original Telebras depositary contract contemplated a single company, and not
13 different shares, including each spinoff and the residual Telebras.
In fact, the Telebras cancellation rate - which was originally 5 cents - was
increased to 45 cents on Sept. 21 when 12 Telebras spinoffs started trading in
Brazil. The fees were lowered to 25 cents in early October.
"If the J.P. Morgan program is not traded, then they should look at the
structure of their program and not at ours. We're very comfortable with the
success our program has had, with the trading volume and the fees," said Joe
Velli, senior executive vice president at BONY. "We see efforts by some of
our competitors to duplicate our instrument as a form of flattery."
A trader who asked to remain anonymous said that the BONY's 25 cent fees
weren't unfair. "Actually it's cheap if you consider that times 13, the fee could
be 65 cents."
Van Raay is unconvinced, and claims that the fee doesn't really represent the
economic cost of cancelling the ADRs, given that the Brazilian market operates
in electronic form.
"I strongly suggest that investors and market participants seek clarification on
the fees," he added.
However, there may be other reasons why RTBs haven't taken off, market
participants say.
One reason why the RTBs sponsored by J.P. Morgan haven't caught on may
be that they arrived late in the game. By Oct. 13, when they were listed, the
RCTB40 receipts were already established as the vehicle of choice for
exposure to Telebras at the local level. Meanwhile, in New York, HOLDRs
enjoyed significant liquidity, with a current market capitalization of around $3
billion, according to BONY.
Another reason for RTBs slow start is the fact that no specific deadline was set
for the conversion, unlike what happened with HOLDRs initial July 27 date.
"People have started depositing the shares (for conversion) at the Brazil level,
which is a slow process," J.P. Morgan's Van Raay said.
Deutsche Bank's analyst Auro Rozenbaum thinks that much like what
happened in Brazil when the RCTB40s were created and languished untraded,
RTBs might pick up volume once the individual spinoff ADRs are listed in New
York.
"Until the (ADRs) are listed, there's no reason to trade RTBs," Rozenbaum
said. "In principle, I don't think the 25 cents (conversion fee) would be so
important."
Yet another contributing factor has nothing to do with fees.
"I believe that the marketing Merrill Lynch did on its retail customers was more
sophisticated," said Selmo Nissenbaum, president of Brazilian brokerage
Agora. "Merrill Lynch has a very good relationship with the local exchanges
and it has been dealing with them for the last six months. They also have a
bigger chain of retail customers."
-By Margarita Palatnik; 201-938-2226; margarita.palatnik@cor.dowjones.com |
