MultinationalBusinessFinanceSixteenthEditionChapter14FundingtheMultinationalFirmCopyright?2022,2019and2016PearsonEducation,Inc.AllRightsReservedLearningObjectives(1of2)14.1 Designastrategytosourcecapitalequityglobally14.2 Examinethedifferencesintheoptimalfinancialstructureofthemultinationalfirmcomparedtothatofthedomesticfirm14.3 DescribethevariousfinancialinstrumentsthatcanbeusedtosourceequityintheglobalequitymarketsLearningObjectives(2of2)14.4 Understandtheroleofdepositaryreceiptsinraisingequity14.5 Analyzetheuniqueroleprivateplacementenjoysinraisingglobalcapital14.6 Explorethedifferentstructuresthatcanbeusedtosourcedebtglobally14.7 DetailthealternativemethodsofstructuringandfundingforeignsubsidiariesFundingtheMultinationalFirmToimplementthegoalofgainingaccesstoglobalcapitalmarkets,afirmmustbeginbydesigningastrategythatwillultimatelyattractinternationalinvestors.Thiswouldmeanidentifyingandchoosingalternativepathstoaccessglobalmarkets.Thiswouldalsorequiresomerestructuringofthefirm,improvingthequalityandlevelofitsdisclosure,andmakingitsaccountingandreportingstandardsmoretransparenttopotentialforeigninvestors.DesigningaStrategytoSourceCapitalGlobally(1of2)Designingacapitalsourcingstrategyrequiresthatmanagementagreeuponalong-runfinancialobjectiveandthenchooseamongthevariousalternativepathstogetthere.Often,thisdecision-makingprocessisaidedbyanearlyappointmentofaninvestmentbankasanofficialadvisortothefirm.Investmentbankersareintouchwithpotentialforeigninvestorsandknowwhattheycurrentlyrequireandcanalsohelpnavigatethenumerousinstitutionalandregulatorybarriersinplace.DesigningaStrategytoSourceCapitalGlobally(2of2)Mostfirmsraisetheirinitialcapitalintheirowndomesticmarket.However,mostfirmsthathaveonlyraisedcapitalintheirdomesticmarketarenotwellknownenoughtoattractforeigninvestors.Incrementalstepstobridgethisgapincludeconductinganinternationalbondofferingand/orcross-listingequitysharesonmorehighlyliquidforeignstockexchanges.Exhibit14.1showsglobalpathstotheavailabilityofcapital.Exhibit14.1AlternativePathstoGlobalizingtheCostandAvailabilityofCapitalIndividualfirmsmaytakemanydifferentpathstoglobalizingtheircostandavailabilityofcapital,allpassingthroughdebttoequity(listingsthenissuance).Oneofthemanypathsisshownhere.Forlongdescription,seeslide48:Appendix1Source:ConstructedbyauthorsbasedontheprinciplesdescribedinCorporateStrategiesinInternationalizingtheCostofCapital,Oxelheim,Stonehill,Rand?y,Vikkula,Dullum,andModén,CopenhagenBusinessSchoolPress,1998.OptimalFinancialStructure(1of2)Thedomestictheoryofoptimalfinancialstructuremustbemodifiedconsiderablytoencompassthemultinationalfirm.Mostfinancetheoristsarenowinagreementaboutwhetheranoptimalfinancialstructureexistsforafirm,andifso,howitcanbedetermined.Whentaxesandbankruptcycostsareconsidered,afirmhasanoptimalfinancialstructuredeterminedbythatparticularmixofdebtandequitythatminimizesthefirm’scostofcapitalforagivenlevelofbusinessrisk.Asthebusinessriskofnewprojectsdiffersfromtheriskofexistingprojects,theoptimalmixofdebtandequitywouldchangetorecognizetradeoffsbetweenbusinessandfinancialrisks.OptimalFinancialStructure

(2of2)Exhibit14.2illustrateshowthecostofcapitalvarieswiththeamountofdebtemployed.Asthedebtratioincreases,theoverallcostofcapitaldecreasesbecauseoftheheavierweightoflow-cost(duetotax-deductibility)debtcomparedtohigh-costequityExhibit14.2TheCostofCapitalandFinancialStructureForlongdescription,seeslide49:Appendix2OptimalFinancialStructureandtheMultinational(1of5)ThedomestictheoryofoptimalfinancialstructuresneedstobemodifiedbyfourmorevariablesinordertoaccommodatethecaseoftheMNE:AvailabilityofcapitalDiversificationofcashflowsForeignexchangeriskExpectationsofinternationalportfolioinvestorsOptimalFinancialStructureandtheMultinational(2of5)Availabilityofcapital:Amultinationalfirm’smarginalcostofcapitalisconstantforconsiderablerangesofitscapitalbudget.Thisstatementisnottrueformostsmalldomesticfirms(astheydonothaveequalaccesstocapitalmarkets),norforMNEslocatedincountriesthathaveilliquidcapitalmarkets(unlesstheyhavegainedaglobalcostandavailabilityofcapital).OptimalFinancialStructureandtheMultinational(3of5)Diversificationofcashflows:Thetheoreticalpossibilityexiststhatmultinationalfirmsareinabetterpositionthandomesticfirmstosupporthigherdebtratiosbecausetheircashflowsarediversifiedinternationally.Asreturnsarenotperfectlycorrelatedbetweencountries,anMNEmightbeabletoachieveareductionincashflowvariability(muchinthesamewayasportfolioinvestorswhodiversifytheirsecurityholdingsglobally).OptimalFinancialStructureandtheMultinational(4of5)Foreignexchangeriskandthecostofdebt:Whenafirmissuesforeigncurrencydenominateddebt,itseffectivecostequalstheafter-taxcostofrepayingtheprincipalandinterestintermsofthefirm’sowncurrency.Thisamountincludesthenominalcostofprincipalandinterestinforeigncurrencyterms,adjustedforanyforeignexchangegainsorlosses.OptimalFinancialStructureandtheMultinational(5of5)Expectationsofinternationalportfolioinvestors:Thekeytogainingaglobalcostandavailabilityofcapitalisattractingandretaininginternationalportfolioinvestors.Ifafirmwantstoraisecapitalinglobalmarkets,itmustadoptglobalnormsthatareclosetotheU.S.andU.K.normsasthesemarketsrepresentthemostliquidandunsegmentedmarkets.RaisingEquityGlobally(1of5)Exhibit14.3describesthreekeycriticalelementstounderstandingtheissuesthatanyfirmmustconfrontwhenseekingtoraiseequitycapital.ApublicorprivateequityplacementWheretolisttheofferingThetypeofissuanceAfirmseekingtoraiseequitycapitalisultimatelyinsearchofanissuance(IPOorSPO),althoughitneednotbepublic.Exhibit14.3EquityAvenues,Activities,andAttributes(1of2)EquityIssuanceInitialPublicOffering(IPO)—theinitialsaleofsharestothepublicofaprivatecompany.IPOsraisecapitalandtypicallyuseunderwriters.SeasonedPublicOffering(SPO)—asubsequentsaleofadditionalsharesinthepubliclytradedcompany,raisingadditionalequitycapital.Euroequity—theinitialsaleofsharesintwoormoremarketsandcountriessimultaneously.DirectedIssue—thesaleofsharesbyapubliclytradedcompanytoaspecifictargetinvestorormarket,publicorprivate,ofteninadifferentcountry.EquityListingSharesofapubliclytradedfirmarelistedforpurchaseorsaleonanexchange.Aninvestmentbankingfirmistypicallyretainedtomakeamarketintheshares.Cross-listing

isthelistingofacompany’ssharesonanexchangeinadifferentcountrymarket.Itisintendedtoexpandthepotentialmarketforthefirm’ssharestoalargeruniverseofinvestors.Exhibit14.3EquityAvenues,Activities,andAttributes(2of2)Depositaryreceipt

(DR)—acertificateofownershipinthesharesofacompanyissuedbyabank,representingaclaimonunderlyingforeignsecurities.IntheUnitedStates,theyaretermedAmericanDepositaryReceipts(A

D

Rs),andwhensoldglobally,GlobalDepositaryReceipts

(G

D

Rs).PrivatePlacementThesaleofasecurity(equityordebt)toaprivateinvestor.Theprivateinvestorsaretypicallyinstitutions,suchaspensionfunds,insurancecompanies,orhighnetworthprivateentities.SECRule144Aprivateplacementsales

aresalesofsecuritiestoqualifiedinstitutionalbuyers

(QIBs)intheUnitedStateswithoutSECregistration.QIBsarenon-bankfirmsthatownandinvestin$100millionormoreonadiscretionarybasis.PrivateEquity—equityinvestmentsinfirmsbylargelimitedpartnerships,institutionalinvestors,orwealthyprivateinvestors,withtheintentionoftakingthesubjectfirmsprivate,revitalizingtheirbusinesses,andthensellingthempubliclyorprivatelyinonetofiveyears.RaisingEquityGlobally(2of5)Exhibit14.4providesanoverviewofthefourmajorequityalternativesavailabletomultinationalfirmstoday:IPOEuroequityissueDirectedpublic/privateissuePrivateplacementExhibit14.4EquityAlternativesintheGlobalMarket(1of2)InitialPublicOffering(IPO)SharesofaprivatecompanysoldtothepublicmarketforthefirsttimeSeasonedoffering—additionalsharesissuedlaterDepositaryreceipts—foreigncorporateissuanceEuroequityIssueAnIPOontwoormoreexchanges,intwoormorecountries,atthesametimeGenerictermforinternationalsecuritiesissuesoriginatingandbeingsoldanywhereintheworldExhibit14.4EquityAlternativesintheGlobalMarket(2of2)DirectedPublic/PrivateIssueSharessoldtoaspecificmarketorexchangeSharessoldtoaspecificsetofprivateinterestsPrivatePlacementPrivateplacementofpublicsharesorprivateinterestPrivateequityStrategicpartner/allianceRaisingEquityGlobally(3of5)InitialPublicOffering(IPO)—thefirstpublicissueofafirm’sequityshares.FirstaprospectusispublishedTheIPOtypicallyrepresents15%to25%ofownershipLaterissuesbythefirmareconsidered“seasonedofferings”WithpublicissuanceofsharescomesgreaterpublicdisclosureRaisingEquityGlobally(4of5)Euroequity

oreuroequity

issue—aninitialpublicofferingonmultipleexchangesinmultiplecountriesatthesametime.The“Euro”market(agenerictermforinternationalsecuritiesissuesoriginatingandbeingsoldanywhereintheworld)wascreatedbythesamefinancialinstitutionsthathadpreviouslycreatedaninfrastructurefortheEuronoteandEurobondmarkets.RaisingEquityGlobally(5of5)Directedpublicorprivateissue–isdefinedasonethatistargetedatinvestorsinasinglecountryandunderwritteninwholeorinpartbyinvestmentinstitutionsfromthatcountry.Theissuemightormightnotbedenominatedinthecurrencyofthetargetmarket.Thesharesmightormightnotbecross-listedonastockexchangeinthetargetmarket.DepositaryReceiptsDepositaryreceipts(shares)arenegotiablecertificatesissuedbyabanktorepresenttheunderlyingsharesofstock,whichareheldintrustataforeigncustodianbank.Americandepositoryreceipts(ADRs)aretradedintheUnitedStatesanddenominatedinU.S.dollars.ADRsaresold,registered,andtransferredintheUnitedStatesinthesamemannerasanyshareofstockwitheachADRrepresentingsomemultipleoftheunderlyingforeignshare(allowingforADRpricingtoresembleconventionalU.S.sharepricingbetween$20and$50pershare).ADRMechanics(1of2)Exhibit14.5presentsthemechanicsoftheissuanceofanADR.TheU.S.investorinstructshisbrokertomakeapurchaseofsharesinthepubliclytradedBraziliancompany.TheU.S.brokercontactsalocalbrokerinBrazil(eitherthroughthebroker’sinternationalofficesordirectly),placingtheorder.TheBrazilianbrokerpurchasesthedesiredordinarysharesanddeliversthemtoacustodianbankinBrazil.TheU.S.brokerconvertstheU.S.dollarsreceivedfromtheinvestorintoBrazilianreaistopaytheBrazilianbrokerforthesharespurchased.OnthesamedaythatthesharesaredeliveredtotheBraziliancustodianbank,thecustodiannotifiestheU.S.depositarybankoftheirdeposit.Uponnotification,theU.S.depositarybankissuesanddeliversDepositaryReceiptsfortheBraziliancompanysharestotheU.S.broker.TheU.S.brokerthendeliverstheDRstotheU.S.investor.Exhibit14.5TheStructuralExecutionofADRsForlongdescription,seeslide50:Appendix3Source:BasedonDepositaryReceiptsReferenceGuide,

JPMorgan,2005,p.33.ADRMechanics(2of2)ADRscanbeexchangedfortheunderlyingforeignshares,orviceversa,soarbitragekeepsforeignandU.S.pricesofanygivensharethesameafteradjustingfortransfercosts.ADRsalsoconveycertaintechnicaladvantagestoU.S.shareholders.WhileADRsarequotedonlyinU.S.dollarsandtradedonlyintheU.S.,GlobalRegisteredShares(GRSs)canbetradedonequityexchangesaroundtheglobeinavarietyofcurrencies.ADRProgramStructures(1of2)SponsoredADRsarecreatedattherequestoftheforeignfirmwishingtobelistedintheUnitedStates.UnsponsoredADRsarearesultofinvestordemandandinitiatedbyaU.S.securitiesfirm—thesemustbeapprovedbythefirmwhosesharesarebeinglisted.ADRProgramStructures(2of2)LevelPrograms:easiestandleastrestrictivelistingrequirementsLevelPrograms:forfirmsthatwanttolistexistingsharesonaU.S.exchange—mustmeetSEClistingrequirementsLevelPrograms:forfirmsthatwanttosellnewequitysharesonaU.S.exchangeSeeExhibit14.6Exhibit14.6AmericanDepositaryReceipt(ADR)ProgramsbyLevelTypeDescriptionDegreeofDisclosureListingAlternativesAbilitytoRaiseCapitalImplementationTimetableLevelromannumeralone.Over-the-CounterA

D

RProgramNone:homecountrystandardsapplyOver-the-counter(O

T

C)–6weeksLevelromannumeralone

G

D

RRule144A/Reg.S

G

D

RProgramNoneNotlistedYes,availableonlytoQ

I

B

s3weeksLevelromannumeraltwoU.S.-ListedA

D

RProgramDetailedSarbanesOxleyU.S.stockexchangelistings–13weeksLevelromannumeraltwo.G

D

RRule144A/Reg.S

G

D

RProgramNoneD

I

F

XNone2weeksLevelromannumeralthreeU.S.-ListedA

D

RProgramRigorousSarbanesOxleyU.S.stockexchangelistingsYes,publicoffering14weeksLevelromannumeralthree

G

D

RRule144A/Reg.S

G

D

RProgramE

UProspectusDirectiveand/orU.S.Rule144ALondon,Luxembourg,U.S.PortalYes,availabletoQ

I

B

s2weeksDRMarketsToday:Who,What,andWhereTherapidgrowthinemergingmarketshasbeenpartlytheresultoftheabilityofcompaniestobothlisttheirsharesandissuenewsharesonglobalequitymarkets.Thishasledtoaninfluxofemergingmarketcompanies.Consistsofamixofmajormultinationals,butparticipationhasshiftedbacktowardindustrialcountries.GlobalRegisteredShares(GRS)Aglobalregisteredshareisashareofequitythatistradedacrossbordersandmarketswithoutconversion,whereoneshareonthehomeexchangeequalsoneshareontheforeignexchange.DifferentfromaglobaldepositaryreceiptinthattheDRisbundledorsplitsothatthepricerepresentsatypicallytradedvalueforthatmarket.AGSRhasthesamevalueeverywhereandisnotbundled(orsplit)forpurposesoftrading.PrivatePlacement(1of3)Privateequityfundsareusuallylimitedpartnershipsofinstitutionalandwealthyindividualinvestorsthatraisetheircapitalinthemostliquidcapitalmarkets.Theseinvestorstheninvesttheprivateequityfundinmature,family-ownedfirmslocatedinemergingmarkets.Theinvestmentobjectiveistohelpthesefirmstorestructureandmodernizeinordertofaceincreasingcompetitionandthegrowthofnewtechnologies.Privateequityfundsdifferfromtraditionalventurecapitalfundsasprivateequityfundsoperateinmanycountries,fundcompaniesinmanyindustrysectorsandoftenhavealongertimehorizonforexiting.PrivatePlacement(2of3)Onetypeofdirectedissuewithalonghistoryasasourceofbothequityanddebtistheprivateplacementmarket.AprivateplacementisthesaleofasecuritytoasmallsetofqualifiedinstitutionalbuyersunderSECRule144A.Sincethesecuritiesarenotregisteredforsaletothepublic,investorshavetypicallyfolloweda“buyandhold”policy.Privateplacementmarketsnowexistinmostcountries.Privateequityfundsareusuallylimitedpartnershipsofinstitutionalandwealthyinvestorsthatarebestknownforbuyingcontrolofpubliclyownedfirmsandtakingthemprivateandresellingafteronetothreeyears.PrivatePlacement(3of3)Cross-listingattemptstoaccomplishoneormoreofmanyobjectives:ImprovetheliquidityofitssharesandsupportaliquidsecondarymarketfornewequityissuesinforeignmarketsIncreaseitssharepricebyovercomingmispricinginasegmentedandilliquidhomecapitalmarketIncreasethefirm’svisibilityandacceptancetoitscustomers,suppliers,creditors,andhostgovernmentsEstablishaliquidsecondarymarketforsharesusedtoacquireotherfirmsinthehostmarketandtocompensatelocalmanagementandemployeesofforeignsubsidiariesRaisingDebtGloballyThethreemajorsourcesofdebtfundingontheinternationalmarketsaredepictedinExhibit14.7:BankloansEuronotesInternationalbondsExhibit14.7InternationalDebtMarketsandInstruments(1of3)BankLoansandSyndications(floating-rate,shorttomediumterm)InternationalBankLoansSimilartotraditionalbankloansTypicallycalledeurodollar

creditsandeurocreditsEnjoysanarrowinterestratespreadof1%orlessbetweendepositandloanratesEurocreditsBankloansextendedtoMNEs,soveriegngovernments,andinternationalinstitutionsinacurrencydifferentfromthatofthelenderTypicallymaturitiesof6monthsorless,pricedatLIBORplusaspreadSyndicatedCreditsLargeloansspreadoveranumberoflendersledbyaleadbankPricingistypicallyatLIBORplusaspreadExhibit14.7InternationalDebtMarketsandInstruments(2of3)EuronoteMarket(shorttomediumterm)EuronotesandEuronoteFacilitiesIssueswithunderwritersShort-termobligationsthatprovedtobevaluablereplacementsofsyndicatedcreditsEurocommercialPaper(ECP)Issuedtothemarket(nonunderwrittenfacilities)Short-termdebtobligationofanMNEorbankTypicalmaturitiesof1,3,and6monthsEuroMedium-TermNotes(EMTNs)NonunderwrittenfacilitiesBridgesthematuritygapbetweenECPandlonger-termobligationslikebondsFollowedtheformsofU.S.shelfregistrationsSameattributesasbondsExhibit14.7InternationalDebtMarketsandInstruments(3of3)InternationalBondMarket(fixedandfloating-rate,midtolongterm)EurobondsUnderwrittenbyaninternationalsyndicateofbanksandsoldexclusivelyincountriesotherthanthecountryinwhosecurrencytheissueisdenominatedStraightfixed-rateissueFloating-ratenote(FRN)Equity-relatedissueForeignBondUnderwrittenbyasyndicateoffinancialinstitutionsfromasinglecountry,typicallydenominatedinthecurrencyofthatcountryEssentiallyaforeignissuerinanationalbondmarketSameattributesastraditionalbondsYankeebonds

(foreignissueintheU.S.),Samuraibonds(foreignissueinJapan),Bulldogs

(foreignissueintheU.K.),etc.UniqueCharacteristicsofEurobondMarketsAbsenceofregulatoryinterferenceNationalgovernmentsoftenimposetightcontrolsonforeignissuersofsecuritiesdenominatedinlocalcurrencies,althoughgovernmentsgenerallyhavelessstringentlimitationsforsecuritiesdenominatedinforeigncurrenciesandsoldwithintheirmarketsLessstringentdisclosureDisclosurerequirementslessstringentthanthoseoftheSECFavorabletaxstatusEurobondsoffertaxanonymityandflexibilityRatingsMoody’sandStandardandPoor’sprovideratingsforselectedinternationalbondsFinancingForeignSubsidiariesTheforeignsubsidiaryofaMNEisfundedwith:Internalfinancingwhich

includesallpotentialsourcesoffundsarisingfromtheMNEitself—theparentcompany,othersubsidiariesandaffiliates,andfundsgeneratedovertimefromthesubsidiaryitself(Exhibit14.8).Externalfinancingcomposedofbothdebt,fromanysourcethatisnottheMNEitself,andequityfrompotentialpartners,localorglobal(Exhibit14.9).Althoughaminimumamountofequitycapitalfromtheparentcompanyisrequiredinitially,multinationalsoftenstrivetominimizetheiramountofequityinforeignsubsidiariesinordertoreducecapitalrisk.Exhibit14.8InternalFinancingoftheForeignSubsidiaryForlongdescription,seeslide51:Appendix4Exhibit14.9ExternalFinancingoftheForeignSubsidiaryForlongdescription,seeslide52:Appendix5SubsidiaryFinancingOverTimeAforeignsubsidiary,likeanybusiness,willhavechangingfinancingasitpassesthroughthreefundamentalstagesofitsbusinesslifecycle:Startup:thesubsidiary’sfinancingislargelyequityduringthisstageGrowth:capitalneedsmaygrowrapidlyandfirmmayincreaseuseofdebtMaturing:businessgrowthslows,andtheneedforadditionalfinancingslowswithitSeeExhibit14.10Exhibit14.10ForeignSubsidiaryFundingOverTimeForlongdescription,seeslide53:Appendix6Ahypothetically“typicalforeignsubsidiary”willneedincreasingcapitalovertimeasitgrows.Assumingstablemarketconditionsandincreasedprofitability,thesubsidiarymayusemoreandmorelocaldebtinitsfinancialstructurewithinlimitsestablishedbylocalnorms.CopyrightThisworkisprotectedbyUnitedStatescopyrightlawsandisprovidedsolelyfortheuseofinstructorsinteachingtheircoursesandassessingstudentlearning.Disseminationorsaleofanypartofthiswork(includingontheWorldWideWeb)willdestroytheintegrityoftheworkandisnotpermitted.Theworkandmaterialsfromitshouldneverbemadeavailabletostudentsexceptbyinstructorsusingtheaccompanyingtextintheirclasses.Allrecipientsofthisworkareexpectedtoabidebytheserestrictionsandtohonortheintendedpedagogicalpurposesandtheneedsofotherinstructorswhorelyonthesematerials.Appendix1LongDescriptionforExhibit14.1Individualfirmsmaytakemanydifferentpathstoglobalizingtheircostandavailabilityofcapital,allpassingthroughdebttoequityvialistingsthenissuance.Oneofthepathsmightinvolvethestepsdescribedas:Thestepsareidentifiedasoccurringindebtmarketsorequitymarkets.Firststepindebtmarkets,internationalbondissueinlessprestigiousmarkets.Secondstepindebtandequitymarkets,internationalbondissueinthetargetorEurobondmarket.Thirdstepinequitymarkets,equitylistingsinlessprestigiousmarkets.Fourthstepinequitymarkets,equityissuesinlessprestigiousmarkets.Fifthstepinequitymarkets,equitylistingintargetmarket.Sixthstepinequitymarkets,Euroequityissueinglobalmarkets.ReturntopresentationAppendix2LongDescriptionforExhibit14.2ThegraphplotscostofcapitalinpercentversusthedebtratioinpercentwherethedebtratioequalsthetotaldebtDdividedbythetotalassetsV.Thegraphhasthreecurvesforksubstartexpressiondleftparenthesis1minusxrightparenthesisendexpressionequalsaftertaxcostofdebt;ksubWACCequalsweightedaverageaftertaxcostofcapital;andksubeequalscostofequity.Thefollowinglistdescribesthebehaviorofthecurves.Allvaluesareestimated.Thecurveforksubstartexpressiondleftparenthesis1minusxrightparenthesisendexpressionrisesawayfromkequals6through(50,7)and(95,21).ThecurveforksubWACCfallsthrough(15,14)to(30,13.5)andthenrisesthrough(95,23).Thecurveforksubefallsthrough(15,15)to(25,14.8)andthenrisesthrough(95,30).Theminimumcostofcapitalrangeextendsfromdebtratioequals30percenttodebtratioequals60percent.ReturntopresentationAppendix3LongDescriptionforExhibit14.5ThestructuralexecutionofA,D,R'sconsistsofstandardissuanceandstandardcancellation.EachprocessinvolvesbrokersandbanksintheU.S.andBrazilianmarkets.Instandardissuance,theU.S.investoraskstheU.S.brokertobuysharesfromalocalbrokerinBrazil.ThelocalbrokerinBrazilbuyssharesfromthelocalmarketanddepositstheminalocalcustodialbank.ThelocalcustodialbanknotifiesthedepositorybankintheUnitedStates,andthedepositorybankthenissuesADR'stotheU.S.broker.TheU.S.brokercanalsobuyADR'sinthelocalmarket.Instandardcancellation,theU.S.investorinstructstheU.S.brokertosellsharestoalocalbrokerinBrazil.Thelocalbrokersellsthesharesinthelocalmarketandinstructsthelocalcustodialbanktoreleasethoseshares.ThelocalcustodialbanksendsinstructionstothedepositorybankintheUnitedStates,andthedepositorybankcancelstheADR's.TheU.S.brokercanalsosellADR'sintheU.S.market.Returntopres