First GDN listing explained

Author: | Published: 15 Mar 2012
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Mexican cement company Pemex’s $70 million listing of global depositary notes (GDNs) on the Irish Stock Exchange (ISE) last month represented the first-ever listing of GDNs on a regulated exchange.

It opens up a new way of providing emerging markets sovereigns and quasi-sovereign corporates’ local offerings with greater liquidity and distribution, improving pricing in the process.

GDNs emulate the terms, including interest rate, maturity date, credit ratings, and law of the local currency-denominated bonds, but trade, settle, and pay interest and principal in US dollars.

They allow offshore investors to trade directly with local investors by being exchanged for the respective underlying bonds and vice versa at any time via a local depositary bank.

Pemex’s landmark listing of GDNs on the ISE’s global exchange market expanded the investor base to include pension and Ucits III funds, which have restrictions on the amount of unlisted securities they can hold.

“We already had several emails from different arrangers in New York and they are all interested in replicating this structure,” said Maurizio Pastore, listing executive (debt securities) at the Irish Stock Exchange.

Fund limits

Citigroup had previously worked on an unlisted GDN issue for the Republic of Peru, which was touted as a success, and before long word got out about the structure to institutional investors and other fund managers. However these investors faced a problem – they have limits on the amount of unlisted securities they can hold.

Ucits III-regulated funds have certain thresholds as to what how many unlisted securities they can hold. Pension funds usually can’t invest in unlisted securities at all.

One source told IFLR that certain US and Canadian pension funds in particular were interested in getting exposure to GDNs and approached Citi to see if it could come up with a way to list these types of securities.


Maurizio Pastore, listing executive (debt securities) at the Irish Stock Exchange, said Citi contacted him and put forward the proposition of listing the Pemex GDNs on the Irish global exchange market.

However a lot of thought needed to go into the structure of the issuer and disclosure regime to meet the ISE’s listing requirements.

To effect a listing, the GDNs would be issued by a separate entity, Citigroup NA (New York).

The ISE received the local offering memorandum from Pemex, which had been reviewed and approved by the Mexican financial regulator.

The exchange required the local Mexican offering memorandum to be translated into English and adapted to Rule 144A/Reg S standards so offshore investors could gain a comfort level with the offering.

A GDN wrapper component, which contained all the information about Citigroup NA as issuer and the GDN offering, served as a supplement to the offering memorandum, which covered the terms and conditions of the GDN programme. This language was supplied by the depositary bank.

Citigroup NA had to agree to stand-by the terms and conditions of the GDN programme as the GDN issuer, and Pemex had to agree to stand-by its documentation and disclosure items.

The depositary bank was only responsible for the terms and conditions of the GDN information within the supplement.

The ISE’s disclosing requirements for a quasi-sovereign company such as Pemex were strict. “We insisted that the documents they were producing would look as much like a prospectus as possible. With all the information about the underlying issuer and securities, plus the information about the GDN and the GDN issuer,” said Pastore.

Defacto sponsored listing

One of the trickiest issues was devising the structure for continuing disclosure obligations, said Pastore.

Normally in a purely unsponsored deal, there is no relationship between the underlying and the depositary bank. The depositary bank can in fact independently issue GDN without the underlying’s consent.

“Pemex didn’t give its consent by contract, but it agreed that for the GDN to be issued they did see the added value for enhancing distribution for their securities,” said Pastore.

Pemex also agreed to provide the financial information, and also the entire offering memorandum about their issuance and the underlying.

“This is a complete novelty,” said Pastore. “We call it a defacto sponsored listing, because an investor will have all the information available in the document. That also gave us the comfort to list a product like that.”

So for example if Pemex had its credit rating changed or other material event occurred to its securities it would have to communicate it to their bondholders, Citi’s depositary bank being one. Citi agreed to inform the ISE with an announcement about any such changes for the ISE to disseminate to the market.

Pastore added that the ISE gained extra comfort from the fact that Pemex already had securities approved by the US Securities and Exchange Commission, and an MTN programme on the Luxembourg Stock Exchange.

The Pemex GDN listing was a hit with investors, and was one and a half times oversubscribed. Pastore said there is a lot of interest in this structure for emerging market sovereigns in particular.

However he isn’t sure whether GDNs are right for all companies that don’t have the backing of a sovereign or aren’t guaranteed by a state controlled entity.

“The Pemex listing was a perfect scenario, but if other companies don’t have the same degree of publicity and don’t have financial information approved by a regulatory body here in Europe or the US, I’m not 100% sure that the listing would happen,” he said.