Monday, January 12, 2009

Canadian ABCP saga nears end

By Boyd Erman in the Globe & Mail:

Canadian savers, corporations and financial institutions will soon have access to $32-billion of their money that's been locked up since 2007 after a judge approved a final restructuring plan for asset-backed commercial paper.

Ontario Superior Court Justice Colin Campbell gave his okay for a renegotiated proposal to swap the frozen paper for new notes that investors can hold or sell. The swap is scheduled to begin Jan. 16.

The approval means the plan has cleared the last major step to resolving the 17-month ABCP crisis, which began when the market for the short-term debt froze in August 2007, stranding investors who couldn't sell or redeem the paper.

Since then, a committee of large investors led by lawyer Purdy Crawford has been seeking a solution.

The plan, which turned into the biggest and most complicated restructuring in Canadian history, had to be renegotiated twice to account for dismal markets. That included a white-knuckle round of talks to save the deal in December.

“I can do little more than congratulate the participants,” the judge said in approving the order.
For most small investors holding less than $1-million of the paper, they will be fully paid out in cash by the brokerage firms that sold them the paper.

The Caisse de depot et placement du Quebec, National Bank of Canada and the rest of the larger ABCP investors won't have it so easy. They will be given bonds that will initially trade at a deep discount to face value. The hope is that they will mature at full value in about nine years.

The deal almost fell apart last month before the Canadian government, along with Quebec, Ontario and Alberta agreed to provide $3.5-billion in backstop credit lines.

The final cost of the restructuring will be more than $200-million in legal and advisory fees. The big investors, such as the Caisse, are footing the bill.

The market for the paper froze in one of the first waves of the credit crisis that has since swept the world. New investors refused to buy the paper on concern that it was backed by subprime mortgages. That left existing investors with no way to sell their ABCP, which had been pitched as a safe short-term investment that was the next best thing to cash.

Big banks that were supposed to take up the slack declined to do so, citing the terms of their contracts to provide backup financing.

That controversial decision meant that the market was set to unravel, leading to big losses for holders. That's when the Caisse and other big holders stepped in and created the Montreal Accord, which put the market in a kind of suspended animation to gain time to seek a solution.

The deal isn't without critics. It contains a clause that prevents lawsuits, which has drawn the ire of some investors who have alleged that the paper was sold under false pretences.

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