|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
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
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.
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.
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
Last Updated: December 18, 2008 16:44 EST
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