Restructuring of $32-billion ABCP market begins

Date: Wednesday, January 21, 2009
Author: Garry Norris, The Canadian Press

The 17-month agony of the Canadian asset-backed commercial paper market is over, with the implementation of a restructuring of $32-billion worth of notes.

However, the pain will linger for years for many institutional and corporate investors.

The Pan-Canadian Investors Committee organizing the restructuring said Wednesday that holders of the seized-up corporate paper investments can expect their new notes within three business days.

Under the court-administered arrangement, the non-bank asset-backed commercial paper will be exchanged for longer-term notes reflecting the maturities of the underlying assets.

Asset-backed commercial paper investments were short-term notes that paid higher returns than other investments and contained packages of debt, including subprime mortgage loans and other structured debt in the United States.

The collapse of the sub-prime housing market in the United States and the financial spillover onto Wall Street led credit markets to begin freezing in August, 2007, and effectively stopped ABCP notes from rolling over routinely as they matured.

That froze up $32-billion worth of the notes in Canada, preventing thousands of companies and investors from getting access to their money because the ABCP could not be valued properly until the true worth of the underlying assets was sorted out.

For small investors holding less than $1-million of ABCP, dealers who sold the notes have undertaken to provide full refunds immediately.

A key — and controversial — aspect of the restructuring agreement is that all sides relinquish the right to sue over losses caused by the tangle.

“We are delighted to announce the successful completion after nearly a year and a half of arduous negotiations, legal challenges and compromise during ever changing credit market conditions,” stated Purdy Crawford, chair of the committee established by big ABCP investors.

The restructuring effort stalled repeatedly as global credit markets kept deteriorating, and ultimately needed a multibillion-dollar guarantee last month from the federal, Quebec, Ontario, and Alberta governments to be completed.

While small investors are likely to get their money back within a week, the best that owners of the new long-term notes can hope for is to recover their principal years hence, with negligible interest in the meantime for most.

The new so-called MAV notes — master asset vehicles — “are quite complex, with many nuances,” James Feehely, senior vice-president at DBRS, told a conference call held by the debt rating service.

DBRS, which has been criticized for high ratings that supported strong investor confidence in the original ABCP investments, is the only agency grading the new notes, providing various ratings from A (low) to top-rated AAA.

Those ratings suggest little probability of default but Feelhely said DBRS has not rated all the new notes involved in the restructuring, and the ratings it has given relate to principal only, not to accrued interest.

There are 157 different classes of new notes, but the bulk of them mature at the end of 2016 and are to pay interest at half a percentage point below the bankers' acceptance rate, which currently is about one per cent, said Colin Kilgour, an independent consultant to corporate holders of ABCP — most of whom bought the paper as what was regarded as a secure, liquid and relatively high-yielding place to park cash.

The unrated notes range from very high quality down to “toxic subprime stuff on which you'd be lucky to see anything back,” Mr. Kilgour said.

There is no secondary market for the new notes yet, but a seller at present would likely get between 25 and 50 cents on the dollar for most of them, Mr. Kilgour said.

He added that many corporate holders of ABCP have been able to borrow from their banks, “so while they may still hold paper and they're not happy about it, they've been able to access liquidity” and are in no rush to sell the new notes.

“For those that are stuck with the notes, they are going to continue to face the pain,” said Daryl Ching, vice-president of Canadian Hedge Watch, a hedge fund advisory service.

“As time progressed, the secondary market for the restructured notes got progressively worse,” Mr. Ching said.

“A lot of the hedge funds that were excited about this opportunity on the buy side ... just lost interest over time, because of how long this process has taken,” he said.

Additionally, he added, at the outset the frozen ABCP looked like the only real opportunity to snap up good-quality assets at an extremely discounted price. “Now, you can find that everywhere.”

Mr. Ching expects the new notes will eventually repay their principal — but “if we're going to see more bank collapses, if we're going to see another Lehman, then there's a likelihood that you won't get par.”

Meanwhile, Coventree Inc. a little-known but significant packager of ABCP which became the canary in the toxic credit-market mine, issued a statement noting that the restructuring releases it from any future legal liability.

As previously announced, after providing transitional administrative services Toronto-based Coventree “expects to implement an orderly wind-down of its operations.”