Friday, December 19, 2008

Canada Agrees to Back C$32 Billion Debt Plan

(Bloomberg) The Canadian government agreed to help backstop a C$32 billion ($26.4 billion) restructuring plan for insolvent commercial paper, increasing the likelihood that the debt swap will be completed after 16 months of negotiations.

The federal government, along with the provinces of Ontario and Quebec, will set up a credit line to support the restructuring plan, Finance Minister Jim Flaherty said in a statement today on the finance department’s Web site. Alberta is also in talks to provide support. The amount of credit wasn’t disclosed.

The government support may keep the restructuring plan from unraveling after Deutsche Bank AG, Citigroup Inc. and other non- Canadian banks threatened yesterday to walk away from the deal if it doesn’t close today.

A committee of 17 institutions, including National Bank of Canada, Canaccord Capital Inc. and Caisse de Depot et Placement du Quebec, said it needed C$9.5 billion in further guarantees from “external sources” to complete the plan.

“This means we should be closing without hesitation,” said Colin Kilgour, a Toronto-based consultant who advises investors on asset-backed commercial paper. “This deal should get done, and it should get done soon.”

Debt Swap
Individual investors and companies including Sherritt International Corp. and airline Transat AT Inc. have been waiting to recover some of their investments in debt that hasn’t traded since August 2007. Under the plan, the 30- to 90-day commercial paper would be swapped for new notes maturing in about eight years.

The support will “allow the investors and asset providers to achieve a stable and effective restructuring agreement,” Flaherty said in the statement.

The non-Canadian banks, which include Bank of America Corp. and HSBC Holdings Plc, agreed last year not to demand collateral tied to the paper while holders worked out a restructuring. Peter Howard, a lawyer who represents the banks, told an Ontario judge yesterday that his clients won’t extend the accord past today. A message left with Howard wasn’t immediately returned.

“Theoretically they could still walk away today, but I would be shocked if they did,” Kilgour said. “They’ve been at this for 16 months and it’s frustrating to have a deal drag out, but if you’re on the two-yard line, put it in the end zone.”

Banks and brokerages that hold the debt soared on the Toronto Stock Exchange. National Bank rose C$2.73, or 11 percent, to C$28.35 at 10:17 a.m., the biggest gain in a month. Canaccord rose 90 cents, or 27 percent, to C$4.18, the biggest increase since the stock began trading in 2004.

Judge Colin Campbell granted a request to extend bankruptcy protection for trusts holding the commercial paper until Jan. 16. That doesn’t affect today’s deadline set by the banks on the standstill agreement.

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