The committee in charge of fixing the frozen market for troubled commercial paper has hurt its chances of quickly securing financial support from the Canadian banks by announcing a backup plan, sources say.
The fact that the funding is guaranteed regardless of whether the Canadian banks step up takes pressure off them, said Daryl Ching, a former sales and marketing employee of Coventree Inc. - the biggest creator of this type of paper - who is now consulting in the market.
Canadian banks may now "feel less urgency to sign up," acknowledged one person close to the restructuring.
The committee, chaired by Toronto lawyer Purdy Crawford, announced earlier this week that it had put together a rescue package for the $33-billion market, despite an outstanding request to the Canadian banks for roughly $2-billion in financial support.
Having missed a self-imposed deadline to find a solution earlier in December, the committee officially gave itself until Jan. 31, but it was aiming to make an announcement by Christmas. Companies that had invested in the paper, and have been stuck holding it, wanted to know that a deal had been reached in time for their year-end book-keeping. And, after months of work, with the holidays quickly approaching, the committee had finally nailed down every detail of the plan except this relatively small part of its $14-billion margin financing, sources close to it said.
As a result, the committee's financial adviser, JPMorgan Chase & Co., promised that if the Canadian banks didn't come through, it would canvass the market for the financing, and, as a last resort, step in itself. That enabled the committee to announce its restructuring plan.
"JPMorgan will be going to market to find funding for any shortfall, but we don't believe there will be any," said Mark Boutet, a spokesman for the committee, which remains adamant the Canadian banks will step up to the plate.
If there is a shortfall, there will be a competitive process that solicits bids from financial institutions around the world, he said.
Mr. Crawford has said that all of the big Canadian banks except for Toronto-Dominion Bank - which was not a player in the market - have indicated an interest in participating in the margin facility.
National Bank has already said it will contribute $500-million to the facility, and it's understood a number of other Canadian banks were supportive of contributing to some extent.
While the committee said it had a fallback plan for the funding it was seeking from Canadian banks, it did not name the provider other than to say it was a foreign institution. The name was revealed in the Financial Times, sparking a new round of criticism toward the committee.
"JPMorgan can't set the benchmark for the spreads and then come in and fund," said Ross Hendrin, a public relations professional who previously did marketing for Coventree. "If there are banks willing to fund, why are we holding guns to the Canadian banks' heads?" he asked.
Mr. Boutet said it's normal for a financial adviser to arrange for funding, and JPMorgan will not receive extra fees for soliciting bids. It provided this guarantee to assure the committee that this was a viable restructuring proposal, with or without the Canadian banks.