Wednesday, December 26, 2007

ABCP committee plans road show to sell deal

(National Post) Investors holding third-party asset-backed commercial paper (ABCP) will soon hear from Purdy Crawford directly, as he plans a road show in the New Year to sell his complex fix for the ailing $35-billion market, which seized up last August.

Mr. Crawford held a press conference Monday afternoon to go over the details of an agreement in principle that was reached Sunday night with many of the key players involved in the third-party ABCP market. Noticeably absent, however, were Canadian banks, which have yet to agree on their role in restructuring the market.

Many of them operate investment banks that were involved in selling the paper to corporate and high-net worth investors, so Mr. Crawford is optimistic they'll will be there in the end, noting that "five of the six Canadian banks have indicated an interest in participating and the sixth one is considering it. Canadian banks have been very co-operative."

The deal covers 20 of the 22 trusts and includes 43 series of notes held in the different trusts. One trust, Skeena, is already going through a restructuring process, while another, Devonshire, which holds about $700-million, continues to be the focus of discussions.

About $3-billion of the total holdings in ABCP contain traditional assets, such as credit card receivables and auto loans, and those trusts will be worked out separately and on a series by series basis and holders will be given "TA tracking notes."

A second tranch of $26-billion in assets, which are largely trusts holding synthetic products, will be split into two separate pooled trusts, MAP1, which will hold $15-billion in assets and MAP 2, which will hold $11-billion in assets. Most corporate investors will likely be placed into MAP 2.

A third category ABCP holding about $3-billion in assets has too much exposure to sub-prime loans and will be worked out separately on a series by series basis.

There will also be a $14-billion margin funding facility that will be used to back the new notes. As well, the trigger points for margin calls have been improved to make it "remote" that they will be triggered, said Mr. Crawford.

That $14-billion includes $8-billion of "self-insurance" margin funding from large investors such as the Caisse de depot et placement du Quebec and Desjardins Financial Group, along with other big financial institution investors. That wil be used to support MAP1.

The remaining $6-billion will come from foreign banks and Canadian banks. They will support the notes in MAP2. The committee overseeing the restructuring has also managed to put in place a back up third-party margin facility that should pick up the slack if the Canadian and foreign banks don't deliver.

"What we're trying to do is save this $35-billion from a meltdown and destruction," Mr. Crawford explained.

It's expected that those who hold the notes for five to eight years, will get their initial investment returned. For investors who need to dump the notes, there is still the question of liquidity and creating a secondary market. However, Mr. Crawford said the notes will be AAA rated by at least two credit agencies, and the committee is examining how a secondary market can be created to trade the notes.

The plan is being met with caution. Daryl Ching, principal at consulting firm Clarity Financial Strategy, says, "It's still extremely difficult for investors to know whether this deal makes sense for them or not. I don't get the feeling that there will be anything to provide relief for investors who are in dire need of liquidity. It seems like answer is, wait till March and hopefully there will be a secondary market [where you can sell your notes.]"

Jeff Carhart, a lawyer at Miller Thomson in Toronto who represents investors, says "I think the big thing is they have been able to get these bank lines of credit in place."

However, he warns, "the devil is in the details on how all these valuations actually shakeout."

Mr. Crawford warned that investors who don't sign onto the work out scheme will be left to fend for themselves. The workout needs approval from two thirds of investors in the different series of notes and the participants will sign releases preventing lawsuits against those participating in the restructuring. Mr. Crawford hopes to have the plan in place by March 2008.

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