By Ken Mark
Asset backed commercial paper (ABCP)
investors may face yet another delay before seeing any money. Ivanhoe
Mines Inc. will go before the Supreme Court of Canada in a bid to
overturn the restructuring deal sanctioned by the Ontario Court of
The restructuring will be further delayed
if the Supreme Court agrees to hear the appeal. But if it turns down the
request, the provincial judgement stands and the ABCP note restructuring
For the moment, lawyers for corporate
investors are girding for another possible court battle. However,
accountants will again be sitting on the sidelines waiting for the next
judicial shoe to drop.
For practitioners, it will be steady as
“With the likelihood of further legal
proceedings, auditors will have to soldier on trying to use appropriate
methods of valuating such investments as they have in the past year,”
says Peter Martin, Toronto-based director of accounting standards for
the Canadian Institute of Chartered Accountants (CICA). “It has been a
difficult time establishing fair value for ABCP investments without a
functioning market setting prices. What they need to do is to continue
applying the existing standards in the CICA handbook.”
But now the guessing game begins. Will the
Supreme Court agree to hear the matter?
“When the court considers the request, two
issues will guide its decision,” says Ivanhoe Mines’ Vancouver-based
lawyer, Howard Shapray.
“One is that the request relates to a
matter of national interest and the other is that there are conflicting
views of two provincial appellate courts — Ontario and Quebec —
regarding the CCAA (Companies’ Creditors Arrangement Act), a federal
Toronto lawyer Philip Anisman says the
dollar amount involved in the case is not an element in the court’s
decision. “It may be relevant, however, if there are broader
implications involved, such as market structure,” he says. “For example,
the recent BCE decision was considered to be major issue since it
involved the responsibility of directors and by implication,
shareholders and employees.”
The key legal issue centres on relieving
all third parties of liability regarding the sale of ABCP, except for
clear cases of fraud. The Ontario Court of Appeal ruling concluded said
that while such legal releases may be “distasteful”, they can be used
when necessary for the greater good, to have a restructuring proceed.
When the Supreme Court will hear the
matter is uncertain. Ivanhoe Mines filed its petition well within the
eight-week window after the Ontario Court of Appeal decision. “What the
court has to decide is the significance of the appeal hearing,” says
Anisman. “If it concludes that it is indeed a matter of national
importance, it can expedite its hearing.”
Shapray said the Supreme Court set a
precedent with its decision to speed up the recent BCE hearing. If the
Supreme Court grants leave to hear the appeal motion, the resulting
delay may encourage firms that sold ABCP to start discussions with
corporate investors about repurchasing the investments. “In the past, it
put pressure on others to react responsibly to meet investors’ demands,”
says Shapray. “Right now, the situation remains very dynamic” If the
Supreme Court overturns the Ontario decision, will it lead to chaos in
Canadian financial markets? “That statement is way overblown,” says
“These securities have not traded for more
than a year without disrupting the overall financial markets.” He
estimates that the total value of the ABCP held by corporate investors
is between $1-1.2 billion.
“These securities have not traded for more
than a year without disrupting the overall financial markets.”
Howard Shapray, lawyer
According to Mississauga, Ont.-based
independent financial analyst Diane Urquhart, had the Canadian banks
originally taken back the ABCP investments they sold there would never
had been a massive restructuring problem.
“Based on my research, they would have
taken as much as a 25 per cent hit to their balance sheets,” she says.
“But they still would have been able to handle it. They all had the
balance sheet capacity to accept substantial losses. No bank would have
needed to be bailed out.”
Whatever the Supreme Court decides, the
financial markets will eventually have deal with the ABCP $32 billion
pool of assets.
Like ancient Gaul, the outstanding ABCP
pool of assets can be divided into three parts. “The most highly prized
group consists of traditional securitized assets, credit card, car loans
and conventional residential mortgages,” says Daryl Ching, Toronto based
vice-president of Canadian Hedge Fund Watch. Their values are relatively
high and stable.
“The second involves CDOs (collateralized
debt obligations) leveraged financial derivatives that that can be
broken down in sub-categories A1 and A2 indicating different levels of
Since many investors have simply lumped
all CDOs together, initially some of them will attract very low bids.
Other investors believe that if held to maturity – seven to nine years –
they will pay out fully, along with accrued interest.
Ching estimates that the best CDOs might
eventually fetch 80 cents to 90 cents on the dollar. Initially,
sophisticated risk-takers will target an acceptable rate of return and
discount their bids accordingly.
However, more mainstream investors such as
insurance companies and pension funds are likely to wait at least a year
for the market to develop a track record.
Then, there is the subprime segment. “This
class appears to be totally toxic,” says Ching. “Recently in the U.S.,
Merrill Lynch cleared out its inventory of such investments at 22 cents
on the dollar.”
And finally as Canadian investors await
the Supreme Court decision, what is on their minds? “The public is now
much more sophisticated about such things,” says Urquhart. “They expect
to see remedies when tainted food enters supermarkets or toxic chemicals
enter the water supply. ABCP is simply tainted investments that got into
the money system.”