Thursday, July 3, 2008

Canadian ABCP: The high cost of delay

(Globa & Mail Streetwise) The lengthy delays in the settlements of the BCE Inc. and ABCP sagas have the potential to become very costly as global credit markets sink into what seems to be becoming a regular summer malaise. The costs of all the court battles that have stymied both transactions have the potential to be much higher than just the tab for the hundreds of lawyers and bankers who have been involved.

For a while, the delays were actually playing into the hands of BCE and the committee overseeing the asset-backed commercial paper restructuring, as every day the credit markets seemed to be on the mend. It's not working that way any more.

Credit default swaps on BB-rated bonds (where BCE will be post-buyout) show a significant decline in investor confidence in the past 30 days. That means one thing - the banks that are backing the buyout will have to take a bigger discount to sell the debt that will be used to fund the purchase. And that likely means harder negotiating stances, which isn't good news for BCE's would-be buyers at Ontario Teachers' Pension Plan or BCE shareholders who have already found myriad ways to spend the $42.75 a share they're expecting.

The same deterioration in the CDS markets has a similar effect on the planned ABCP restructuring, with the widening spreads taking the new paper closer to triggering margin calls. That has two big knock-on effects. For starters, it means that even if the restructuring works, the market for the new paper that will be issued will be softer than had it happened a month ago. That means forced sellers are in for an even bigger haircut. And if the restructuring founders for some reason, the wider spreads will make it tougher to resuscitate.

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