Wednesday, December 26, 2007

Crawford succeeds where no one could

(Financial Post) Whether or not you agree with Purdy Crawford and the way he is handling the $33-billion third-party, asset-backed commercial-paper (ABCP) crisis, you have to give him credit. He has been the only guy globally that has managed to bring parties together to find a solution to the growing credit crunch that has afflicted structured investments, and his reputation was the key to getting the deal done.

In the United States, a planned US$100-billion bailout of the structured investment vehicle (SIV) market was abandoned by large banks, which decided instead to bring the cash-strapped paper onto their own balance sheets. In Europe, individual banks are also frantically propping up troubled SIVs, rather than coming to a collective agreement.

The Canadian restructuring is far from a done deal and it comes at a fairly high price, from a credibility standpoint, as Mr. Crawford's committee twice missed key deadlines and faced the wrath of countless investors in the notes and at least one chief executive of a Canadian bank.

So what's changed between Dec. 14, when the package was expected to be announced, and Dec. 23, when the committee issued its plan? The problem, says Mr. Crawford, was that by the Dec. 14 deadline, "the negotiations with the dealer banks (the foreign banks behind much of the third-party ABCP) were not completed."

At the same time, the committee was negotiating with the Canadian banks about their role in fixing the market.

The problem was essentially one of distrust. It wasn't clear to many of the Canadian banks what kind of skin the foreign banks were putting into the game. The foreign banks were the ones that reaped the lion's share of the fees earned in third-party ABCP. The role of Canadian banks was largely confined to sellers of the commercial paper through their investment-banking arms.

One source on the Canadian bank side said that they were sent a bare-bones term sheet without a lot of disclosure as to what the foreign banks were contributing. There was also a sense that Mr. Crawford's committee was bullying the banks into accepting a deal and one source says, "You don't treat Canadian banks that way."

Steve Halperin, the lawyer at Goodmans tapped by Mr. Crawford to lead the legal team, says the negotiations have been complex and challenging. "The reality is that there are so many parties involved. We have an investor committee that is about 18 members (mostly those institutions that have the biggest holdings in ABCP). We are dealing with foreign bank asset providers that are eight or nine in number and located in various locations around the globe and we have been engaging with the Canadian banks." There are also the various conduits and indenture trustees that must be consulted.

The problem, he says, is that "every time you make a change to give effect to somebody's requirements, you may have to go back and renegotiate because of the impact that has on everybody else."

In terms of the dust-up with the Canadian banks, "to some degree it was just a timing problem. We needed to know what we could get from our own investors and what we could get from the dealer banks (the original parties to the Montreal Proposal) before we knew what the ask was for the Canadian banks.

"These are big numbers these are significant issues. Understandably, the Canadian banks need to take some time to get them comfortable with what we're asking for."

What the committee appears to be asking for is about $2-billion in margin commitment to fund a $14-billion margin facility to back the two pooled trusts.

About $8-billion of the $14-billion facility will come from large Quebec investors holding the paper, such as the Caisse de dépôt et placement du Québec, Desjardins Financial Group and National Bank Financial, and it will be used to back potential margin calls.

That commitment seems to have broken a logjam that was building among the parties. Mr. Crawford says the Quebec group's commitment to self-fund their margin was critical. "I am not saying this wouldn't have been possible, otherwise, but it certainly opened the door."

The foreign banks have come to the table in two key ways. "They not only came up with some margin funding, they also came up with changing the triggers (on the margin calls to make them less likely to happen)," explains Mr. Crawford. That will be critical should the assets decline and credit markets continue to roil. The foreign banks' contribution to the margin facility appears to be about $4-billion, though the committee has yet to disclose which banks are participating and for how much.

So what brought the foreign banks around? Mr. Crawford says they "might have realized what a heck of a good deal they have in Canada in terms of achieving an overall result rather than a meltdown."

It's now up to the Canadian banks to step up and fund about $2-billion in margin, and those discussions are ongoing. If they don't, the committee has secured a $2-billion backup from an undisclosed foreign bank.

But Mr. Crawford is adamant that won't be necessary as he feels the Canadian banks will fund in the end.

And at least one Canadian bank official close to the negotiations credits Mr. Crawford's reputation as the factor that has allowed his bank to get this far. "It was hugely important to have his name associated with the restructuring," said the official, who asked not to be identified.

The framework is now in place, says Mr. Halperin. "The negotiation, to a large extent, has been done. There's a lot of hard lifting left for lawyers at Goodmans and other places. There's a lot of documentation to be done. But that's really process and implementation."

Sam Billard, a lawyer who criticized the committee for not opening up the market to allow investment funds to buy the distressed paper, admits it's a "remarkable feat what they have been able to achieve," though adds that the deal appears to favour larger financial institutions that can hold the paper over time and questions the liquidity of the notes and their ability to trade in an over-the-counter market.

Mr. Crawford, however, contends the heavy lifting is done and plans to do a road show for investors to sell the plan. "All I have to do now is crack the whip and tell the committee's legal advisors and financial advisors to get the hell busy and let's get this stuff done."

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