(Globe & Mail) The Crawford Committee managed to secure its rescue effort to restructure $33-billion in asset-backed commercial paper (ABCP) in time for exhausted negotiators to take a holiday break, but some of the banks have still not signed on.
Sources familiar with discussions said some of the Canadian banks have thus far declined to sign an agreement to provide funding support to the sector because the formal request came late last week, when a number of senior executives had already left for the Christmas break.
The committee that's working to fix the sector wanted the banks to contribute more than $2-billion to a $14-billion margin facility that will be key to the restructuring.
It is understood that some banks, such as National Bank of Canada, quickly agreed, but others, including Toronto-Dominion Bank and Royal Bank of Canada, were not prepared to make a decision until January. In the meantime, the committee headed by Toronto lawyer Purdy Crawford arranged a backup facility from a foreign institution so that it could go ahead and announce its solution to restructure the market - something it had hoped to do by Christmas.
The short-term commercial paper will be turned into longer-dated notes, most of which will mature between five and eight years from now. The restructuring plan should ensure investors recoup most of the face value of their paper by the time the notes mature, if not sooner, the committee said.
The $14-billion margin facility, or backup loan, will help stabilize the market and protect against the threat of liquidation by funding margin calls on the assets that underlie the new notes.
The committee was able to get financial support for the facility from some of the banks that had been dealers in the paper, as well as from some of the big investors in the paper. Both groups had an interest in ensuring that the market gets back on its feet.
The committee then turned to Canada's big banks, and asked them to collectively provide support, Mr. Crawford said.
"The reality is, before we knew what the 'ask' had to be to the Canadian banks, we had to find out how much was coming from investors and what was coming from the dealer banks," Mr. Crawford said on a conference call Monday.
Mr. Crawford said "five of the six Canadian banks have indicated an interest in participating, and the sixth one is considering it, although the sixth one has no skin in the game so their motive would be entirely ... for the benefit of the financial markets."
That sixth bank is Toronto-Dominion, whose chief executive officer Ed Clark has been resistant to taking on any extra risk to bail out a market in which the bank was not a player.
TD spokesman Simon Townsend said Monday that "the committee didn't need us at this stage, so currently, TD is not a participant in the agreement. We remain involved in the process and will continue to participate in the ongoing discussions. TD is willing to consider measures that support the orderly resolution of the situation," depending on the risk parameters, he said.
National Bank executive Brian Davis said National has agreed to commit $500-million to the facility.
Other banks declined to comment or could not be reached.
It is understood that Bank of Canada officials have been encouraging the Canadian banks to contribute to the margin facility, but some bank executives are concerned about potential future risks at a time of global credit uncertainty.
Mr. Crawford said he's confident the Canadian banks will come onside. "It's just a question of time," he said. "We have a backup facility, if we have to use it, that would guarantee the margin facility."
That backup loan is being provided by a foreign third-party independent financial institution, he said, declining to name it. "I don't think it will ever be named because Canadian banks will provide [the funding]," letting the foreign institution off the hook, he said.
"Some of them have skin in the game," Mr. Crawford said. "They will want to participate."
"I'm sure we will achieve all the margin facility for calls that we need with the investors, with the dealer banks, and with the Canadian banks," Mr. Crawford said. "But if not, the margin facility - to the extent we don't achieve it all - would be provided by this other financial institution."
Of the international banks and major Canadian funds that signed an agreement in principle last week to provide more than $10-billion of support, it is understood that $8-billion will come from a handful of funds that were left holding the largest share of ABCP after a global liquidity crisis brought the market to a standstill in August. Those investors include the Caisse de dépôt et placement du Québec, Desjardins and other Canadian investors.
In addition, a small group of large foreign banks agreed to provide more than $2-billion for the special margin loan. These banks, HSBC, Deutsche Bank and Citibank, were a major source of the financial assets that backed ABCP and one bank, HSBC, also actively sold the notes in Canada.
THE LEGAL FACTOR
Banks and other players involved in the ABCP restructuring are seeking so-called releases from ABCP holders to eliminate the legal risk of being sued for their various roles in the creation and selling of the short-term notes.
A few lawsuits have already been launched by investors and others have indicated they have hired lawyers. These investors have said they would consider releasing their right to sue if they recovered most of their money.
Stephen Halperin, a lawyer advising the committee, said "we are confident" it can win releases. The deal has to pass other hurdles, including approvals from Revenue Canada Agency, pension regulators, and possibly the Office of the Superintendent of Financial Institutions. The key approval is that of the investors who hold at least two-thirds of the value of each ABCP trust.
If investors don't approve? "I don't want to sound rough, but they're on their own," said Purdy Crawford, who headed the restructuring committee. "They're back to where they are now."