Tuesday, May 5, 2009

Canadian ABCP trades at a deep discount

Posted on the Globe & Mail's Streetwise by Andrew Willis:

The first signs of trading in the asset-backed commercial paper market do not bode well for investors who continue to hold this troubled debt.

A $32-billion slice of Canada's ABCP market was restructured last year after 18 grinding months of corporate brinksmanship. Most retail investors got paid out at 100 cents on the dollar. However, institutional holders of this supposedly low-risk debt - everyone from junior mining companies to big Quebec pension plans - took a haircut on its value by swapping the short-term paper for much longer-term notes.

To date, most of these investors have simply swallowed hard and opted to continue holding ABCP, now known by the name Master Asset Vehicle. There is MAVI and MAVII, and various other flavours of this debt that are considered more risky. Owners of the MAVI and MAVII debt tend to value the paper at something in the 50-to-60-cent on the dollar range.

Last week saw two small chunks of this debt change hands. When you read the price, you'll understand why so many financial institutions want a degree of flexibility on market-to-market valuations of their troubled holdings.

There was a $170,000 trade in MAVI bonds that took place at 35 cents on the dollar. An even smaller, $70,000 trade in the MAVII notes played out at the same price.

Should pension funds such as the Caisse de dépôt et placement du Québec now slash the valuation on their own, large MAV note holdings to reflect these trades, which likely played out on behalf of some unfortunate junior mining company? In a word, no.

Major investors can afford to hold their MAV notes to maturity, and the price of this debt is likely to rise. But the trading that is now playing out shows the restructured ABCP market is still worth a fraction of what it was before the credit crisis.

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