Wednesday, February 27, 2008

Today's a big day for BMO and ABCP exposure

(Globe & Mail Streetwise) Today is a big day for Bank of Montreal as it tries to avoid a $495-million writedown on its exposure to ABCP trusts called Apex and Sitka.

Last week, the bank said that it could write off the whole exposure if the restructuring of Apex/Sitka failed. Today is deadline day, because the trusts face a collateral call at close of business today if the bank, which sponsors the trusts, cannot negotiate an agreement with a swap counterparty, according to DBRS.

Without an agreement, BMO would either have to put up the collateral or face a "notice of failure" that could lead to the sale of assets from the trusts after a short grace period (usually three days). That collateral is not worth much in today's markets, with the kinds of structured products that are in the trusts selling at big discounts to face value.

It's a big issue for the overall restructuring process for ABCP, argues RBC Dominion Securities analyst Andre-Philippe Hardy. While he continues to expect a restructuring of the roughly two dozen frozen ABCP trusts that the Crawford Committee is working on, many may face a similar problem because their holdings are structured in the same ways.

If the move down in credit markets has spooked swaps counterparties, that could be the reason the Crawford Committee has gone silent in recent days, even as investors wait for an update on whether a standstill with counterparties that expired on Friday has been extended.

"If the delay is due to swap counterparties becoming less supportive of the restructuring and they ask for margin to be posted, it could derail the restructuring," Mr. Hardy wrote in a note to investors today.

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