Monday, March 17, 2008

Court protection sets stage for new debt fight

(Globe & Mail) The committee working to restructure $32-billion of commercial paper has put the investments into bankruptcy protection, and will now work to sell investors on its plan.

The plan, if approved, would shield the market's key players from lawsuits. That is expected to be a big source of tension.

The restructuring will have an impact around the world, Toronto lawyer Purdy Crawford, who is heading the committee, said outside the courtroom after Mr. Justice Colin Campbell of the Ontario Superior Court approved the bid to put the sector under the protection of the Companies' Creditors Arrangement Act.

“Everybody's interested in whether we can be the first country to complete a successful restructuring without governments bailing anybody out,” he said yesterday. “And hopefully it will help cool out the markets worldwide; certainly that's the view of the head of the Bank of Canada.”

Central bank governor Mark Carney reiterated yesterday that he believes the committee's work avoided a fire sale in the sector by essentially freezing the paper through a standstill agreement.

Finance Minister Jim Flaherty said “the court has now approved a process for investors to vote on the restructuring proposal based on detailed information provided by the investors committee and its advisers. I encourage all investors to consider it seriously and to participate in the voting process.”

Mr. Crawford sought to head off what he knows will be one sore spot for some investors.

These are blanket legal releases, which will be given to nearly all participants in Canada's third-party asset-backed commercial paper sector if the committee's current plan is approved. The releases would be extended to banks, credit rating agency DBRS Ltd. and brokers, in addition to the companies that created the paper, making it more difficult for investors in the sector to successfully sue them.

“Some investors believe they have rights to sue parties on account of their losses,” and that the releases would take those rights away, Mr. Crawford said in an affidavit filed in court yesterday. “Some have told me they support the financial aspects of the plan, but do not wish to release the parties they believe should be held responsible to them for their losses.

“I understand these views. However, negotiation of the plan has been the art of the possible,” he said, explaining that some key players in the restructuring said they wouldn't participate without the releases.

It was a group of investors that hold more than $21-billion of the paper – including Crown corporations, financial institutions and companies – that pushed the 20 trusts that created the paper into court proceedings, under which the committee will finalize its plan to fix this market.

A key standstill agreement that had been keeping the market frozen, and preventing the paper's value from crashing, expired at midnight on Friday. The court protection now extends until April 16, at which point it could be extended, while the committee has negotiated a standstill agreement with the asset providers until the end of April.

Some key details of the plan are still being negotiated.

To date, the committee has secured 98.5 per cent of the $14-billion in backup funding commitments it needs for the smooth operation of the restructured market.

“The reality is we've gone through hell with the markets since we signed off in December,” Mr. Crawford said. At that point, they were asking the Canadian banks and other parties who were contributing to the standby line of credit to do so for 160 basis points, when the going market rate would have been 250 to 300 basis points. “Today, it would cost 500 to 600,” Mr. Crawford said, but the credit line is being obtained at the original price. (A basis point is 1/100th of a percentage point.)

The committee expects some of the new longer-term notes that will be created by the restructuring will receive investment-grade ratings by DBRS. It “attempted to obtain ratings from a second rating agency, but could not do so,” Mr. Crawford said in his affidavit.

A key aspect of the restructuring involves taking the short-term paper and transforming it into longer notes, with maturity dates of up to nine years.

Those who hold the notes to term should recoup much of their value, Mr. Crawford said yesterday. “What they get if they trade in the market over the next year or two, who knows, depending on the world markets,” he said.

Mr. Crawford will soon be travelling across the country to hold meetings with investors, who will be able to vote on the plan at a meeting that's expected to be held in late April.

The plan must be approved by a majority of the noteholders, who each get a vote regardless of the size of their holdings. Those who vote in favour must collectively hold at least two-thirds of the value of the notes for the vote to succeed. The plan would then have to be sanctioned by the court.

In its request for bankruptcy protection, the committee said “in the absence of a successful restructuring, there will be serious losses, measured in billions of dollars, to investors and other market participants.”

Mr. Crawford said the Canadian banks are all on board, although “some negotiating” remains.

The six largest Canadian banks had originally been asked to contribute about $2-billion to the backup credit line, which is also receiving support from foreign banks and some of the sector's large investors.

Court documents state that, on March 13, the Bank of Montreal, Canadian Imperial Bank of Commerce, Royal Bank of Canada, the Bank of Nova Scotia and Toronto-Dominion Bank indicated, in a non-binding letter, that they were willing to collectively provide $950-million to the line of credit.

Mr. Crawford held “several discussions” with Mr. Carney to keep him apprised of the negotiations with the Canadian banks during the month of February, the documents state.

The committee said that the credit line is short by about $220-million now.

It also said that the combined fees, costs and expenses for the plan – including those for lawyers and advisors – are expected to be about $80-million to $100-million.

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