Wednesday, February 25, 2009

How ABCP plays into Caisse loss

Andrew Willis (Globe & Mail StreetWise):

As bad as the Caisse de dépôt et placement du Québec's performance numbers look, its 25 per cent loss actually understates a miserable year for the pension fund.

A large part of the Caisse's loss in 2008 came on its $12.8-billion portfolio of asset-backed commercial paper, which was written down by a further $3.8-billion last year. Over all, the Caisse's ABCP program is now valued at $7.2-billion, or 57 cents on each dollar of face value.

Now, if you're a pessimist, you'd argue that this valuation is generous. When ABCP that's been restructured in a Caisse-backed rescue finally starts to trade, bond desks will tell you that the new notes are going to change hands at around 30 cents on the dollar. The exact price is going to reflect the quality of the underlying assets owned by investors - all ABCP is not created equal - and the sophistication of the seller.

As it gets rolling, the ABCP market promises to be ugly (or inefficient, to use a less loaded description), which is why banks hung up in the ABCP mess are advising clients to sit tight on the paper. But if this debt is in fact trading at 30 cents on the dollar, the Caisse is down far more than advertised.

Now, if you're of an optimistic bent, then the ABCP situation is improving. A lengthy and complex restructuring is now complete, and commercial paper has been transformed into notes that mature in eight years. For investors who don't need to cash in right away, holding on to ABCP means making back paper losses.

That positive attitude prevails at the Quebec fund, as the Caisse said Wednesday in a release that it “believes that a large portion of this cumulative provision will be reversed in the years to come.”

Most fixed-income investors agree that, over time, the Caisse will make back some of its ABCP losses. But the pain caused by this outsized holding in flawed assets stands as a permanent stain on the records of Caisse executives, including departed CEOs Henri-Paul Rousseau and Richard Guay.

As acting CEO Fernand Perreault said Wednesday: “The ABCP episode is without doubt a difficult page in the Caisse's history.”

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