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Deutsche Bank, Citigroup Threaten Canada Debt Plan

By Joe Schneider

Dec. 18 (Bloomberg) -- Deutsche Bank AG, Citigroup Inc. and other banks backing a plan to convert C$32 billion ($27 billion) of insolvent Canadian commercial paper said they will walk away from the deal unless it’s completed tomorrow.

The non-Canadian banks, which include Bank of America Corp. and HSBC Holdings Plc, agreed last year not to demand collateral tied to the paper while holders worked out a restructuring. Peter Howard, who represents the banks, told an Ontario judge today that his clients won’t extend the accord past tomorrow.

“The asset providers are ready to close the deal,” Howard told Ontario Superior Court Judge Colin Campbell at a hearing in Toronto. “Others are seeking enhancements.”

Ending the agreement would free the banks to make margin calls on trusts that own the paper, scuttling plans to swap the short-term debt for longer-term notes and making the paper almost worthless. Caisse de depot et Placement du Québec, the province’s pension plan, holds paper originally valued at C$13 billion. National Bank of Canada’s holdings were originally worth C$2.2 billion and ATB Financial, the Alberta government- owned bank, owns paper once valued at C$1.2 billion.

National Bank fell C$2.28, or 8.2 percent, to C$25.62 at 4:16 p.m. in trading on the Toronto Stock Exchange. The shares have fallen 51 percent this year.

The banks’ stance puts “guns to our heads,” Campbell said. Referring to the first business day after the deadline, he asked, “What happens on the 22nd” of December?

“The unthinkable,” is an option, Howard said.

‘External Sources’

A committee of 17 institutions, including National and Caisse de Depot, said it needs C$9.5 billion in further guarantees from “external sources” to complete the debt conversion. The committee is also attempting to change the credit spreads in the agreements that would trigger margin calls, to give the noteholders more leeway.

“The spreads today are at near-record levels,” Fred Myers, a lawyer representing the committee, told the judge. He said the changes will require further negotiations and asked that bankruptcy protection for trusts holding the asset-backed commercial paper, or ABCP, be extended to Jan. 16.

Campbell granted the request. That doesn’t affect tomorrow’s deadline set out by the banks on the standstill agreement.

Under the plan, in the works for about 16 months, insolvent 30- to 90-day debt would be converted into new notes maturing in about eight years. The asset-backed paper hasn’t traded since August 2007, when investors began to shun the debt because of concerns about ties to high-risk mortgage loans in the U.S.

A collapse of the agreement would leave about 1,800 individual investors, including farmers, students and retirees, with potential losses of their life savings. Under the restructuring, those investors would be fully repaid by Canaccord Capital Inc. and Credential Securities Inc., two Vancouver-based brokerages that sold them the debt.

‘Do-or-Die’

The banks’ threat may be a message to the federal government to backstop the deal with the C$9.5 billion guarantee, Colin Kilgour, a consultant to investors in the frozen debt, said in a telephone interview today.

Howard is “basically saying ‘this is our direct and best shot to the government, threatening that, if you’re not here, this deal is going to go down,” Kilgour said. “This is basically a do-or-die situation.”

Canadian Finance Minister Jim Flaherty said yesterday, following a meeting with his provincial counterparts in Saskatoon, Saskatchewan, that they had some discussions about assisting the plan. Several ministers are reviewing proposals, he said.

The government shouldn’t provide the guarantees, said Eric Sprott, chief executive officer of hedge-fund manager Sprott Inc., which has about C$5.6 billion under management.

“ABCP in this country is worthless,” Sprott said today in an interview. “The money is gone. It’s dead.”

The case is In the Matter of Metcalfe & Mansfield Alternative Investments, C48969, Court of Appeal for Ontario (Toronto).

To contact the reporters on this story: Joe Schneider in Toronto at jschneider5@bloomberg.net. 

Last Updated: December 18, 2008 16:44 EST

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