Tuesday, December 30, 2008

DBRS to cut rating for new Canadian ABCP notes

By Tara Perkins in the Globe & Mail:

DBRS Ltd. has lowered the rating it plans to give to new notes that will come out of the 16-month process to fix the market for $32-billion worth of frozen asset-backed commercial paper.

The Toronto-based credit rating agency said yesterday that it will be assigning a single-A rating to the notes, because "a number of challenges have arisen" since April, when it had said it expected to assign a double-A rating.

Credit spreads have widened significantly and some of the assets that were underlying the commercial paper have faced pressure.

DBRS was the only agency to rate the commercial paper before the market seized up as a result of the liquidity crisis in August, 2007, and much of the paper had received top ratings. A report by Canada's brokerage industry regulator, the Investment Industry Regulatory Organization of Canada, found that most brokerages selling the paper said they did not conduct internal due diligence reviews of the complex product because they relied on the high credit rating the paper received from DBRS. The rating agency has taken significant heat as a result of its ratings.

It continues to be the only agency to rate the new notes. Yesterday, rival Moody's Investors Service said it is not rating them.

On Christmas Eve, the committee that's been working to restructure the frozen commercial paper market announced that it finally had a new plan that should allow the market to thaw early in the new year, thanks in part to support from the government and other backers.

A significant amount of the money that will be backing the restructuring plan was conditional on the notes receiving a credit rating of at least single-A.

"We do not believe that the A rating will affect the ability of note holders, who would have been able to hold AA rated notes, to hold the restructured notes," a source close to the committee said yesterday.

A number of investors, from corporations to pension plans, have rules that outline the minimum credit rating an investment product must receive in order for them to hold it.

The judge overseeing the restructuring of the market will be asked to sign off on the committee's latest plan in January, after which the commercial paper can be swapped for the new notes. It is not the first time that the committee has presented a plan, but it now hopes the restructuring will be completed by Jan. 16. A key element of this fix was an agreement from Ottawa, Alberta, Quebec and Ontario to provide a backstop credit line totalling $3.5-billion.

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