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Long-thawed ABCP market simmering to a boil

Date: Wednesday, November 25, 2009
Author: Boyd Erman, The Globe and Mail

Hedge funds snap up notes in elusive search for double-digit return

Almost a year after the completion of the landmark deal to save the $32-billion asset-backed commercial paper sector, one of the key pledges of the deal's creators is coming true: investors stuck with the paper can now get out.

Hedge funds, mostly ones based in Canada, are snapping up notes that were distributed to smaller holders, such as mining companies, Crown corporations and corporate pension plans that were saddled with frozen ABCP, and which are now looking to get some cash or cut losses. The paper held by the Caisse de dépôt et placement du Québec, National Bank of Canada and the other large holders who were responsible for crafting the restructuring deal isn't on the market, traders said.

But the market for the notes has heated up significantly in recent weeks, with traders reporting that lots of paper as big as $40-million are changing hands. Prices have jumped as well, with the highest-quality notes now selling in the 50-cents on the dollar range, which implies about a 10-per-cent annual return if a buyer holds on until the paper matures in six years.

The growing activity in the market is a victory for the Purdy Crawford-led committee that crafted the restructuring of the ABCP market, which was completed in January after more than a year of agonizing negotiations. One of the main goals was to give investors new paper that they could at least sell, even if it wasn't for full value immediately. Because of the way the notes work, the prices should move closer to 100 cents on the dollar as the paper approaches maturity in 2016.

"It is finally trading, so at least you can get out if you want to," said John Rudd, a managing director at Miller Tabak Roberts Securities in New York, which has traded more than $100-million of the paper.

Investors who held frozen ABCP after the market seized in mid-2007 as the credit crunch got rolling were given new paper earlier this year at the end of the Crawford committee's work. For the first few months, very little paper changed hands, even though it was theoretically freely tradable.

Traders attribute the new found interest in ABCP of late to hedge funds that are seeking ways to get double-digit returns, which are getting tougher to find now that stocks and bonds have had huge rallies.

In March and April, there were many fixed-income assets such as corporate bonds that were offering big yields, so investors weren't generally interested in ABCP, given how complex it is. Since then, most other assets have had big runs, and ABCP lagged, so investors began to take a second look to see if there was still money to be made.

"More and more hedge funds, including U.S. hedge funds, are starting to take a look at this," Mr. Rudd said.

Still, the notes are enormously complicated, requiring those interested in buying them to wade through hundreds of pages of documents to understand the underlying assets that determine the value of the notes. That remains a turnoff for some who have considered buying.

"There are easier ways to make 10 per cent," said one hedge fund money manager who has looked at buying the notes and taken a pass.


The new ABCs of ABCP

- What's happened ABCP holders were given new paper in January that they were free to sell - but, the market is only heating up now.

- Size of the market: Potentially about $10-billion, but only a fraction has traded hands so far.

- How much does it cost? The best paper on offer is trading for a little more than 50 cents on the dollar.

- Who's buying? Hedge funds looking for double-digit returns and willing to do their homework.