May 12, 2008
Canaccord Capital can’t seem to do the right thing these days — even
when it tries.
Less than a week after the embattled
Vancouver investment firm received kudos for offering to buy back toxic
investments sold under questionable conditions to retail and business
clients last year, it was under fire for misleading the market over the
state of its balance sheet.
Thanks to global fears over U.S.
sub-prime mortgage assets, at least 1,800 average Canadians were caught
holding potentially worthless debt instruments last August, when the
supposedly liquid $32-billion market for so-called non-bank asset-backed
commercial paper (ABCP) turned to ice.
The individuals in question
collectively invested hundreds of millions of dollars, expecting to earn
a relatively decent rate of return on short-term and highly liquid
financial products that were frequently compared to GICs. Canaccord was
not the only seller of ABCP to retail buyers, but it was the largest,
and it has been repeatedly accused of misrepresenting the risks
associated with the paper.
In one e-mail obtained by Canadian
Business, a Canaccord investment adviser told a conservative client that
ABCP notes were “fully secured. So no worries.” When defending itself
last September, the firm said it relied on the high credit rating given
to the ABCP and insisted it had no legal obligation to reimburse anyone.
When hit with an investor lawsuit in December, Canaccord alleged Scotia
Capital aggressively pushed the paper on the brokerage while failing to
warn it of the risks involved.
Nevertheless, on April 9, Canaccord
announced a relief program that will see it pay $138 million to buy back
ABCP at 100% on the dollar (plus interest) from clients with $1 million
or less invested in the toxic paper. The program is contingent on
approval of a market restructuring (slated at press time to be put to a
vote on April 25) developed under the Companies’ Creditors Arrangement
Act, which aims to turn ABCP into long-term bonds. If the CCAA plan is
approved, investors should get a considerable portion of their money
back over a 10-year period — or when stability returns to the market. If
the restructuring fails, retail and corporate holders, along with
pension funds and ABCP brokers like Canaccord, could lose everything
Earlier this year, retail investors
attacked the CCAA efforts when details were outlined by Bay Street
lawyer Purdy Crawford, the restructuring committee chairman, during a
cross-country roadshow. But Canaccord’s move to appease retail
investors, which has now been matched by Credential Securities Inc.,
greatly increased the odds for creditor approval.
Canaccord’s larger note holders, along
with corporate clients of National Bank and other ABCP dealers, are now
angrier than ever since they have more money at stake than retail
players. But this camp lacks the voting strength held by the smaller
investors who successfully joined forces to fight for their money using
the Facebook social network. The bigger ABCP holders still hope to delay
the vote and want the court to empower them to block any deal they don’t
support as a separate class of investors. But retail investors,
including about 97% of Canaccord’s clients, are now expected to sign
away the right to sue ABCP dealers and sponsors by supporting the
restructuring plan. And that helps explain why Canaccord’s stock surged
almost 10% after the program was made public.
On April 14, however, Canaccord
announced a new $60-million share issue. And that bought-deal financing
surprised the Street since Canaccord said it did not need additional
capital when announcing the ABCP relief program — despite the
$54.2-million pretax hit that it will take as a result of the client
Canaccord did not return requests for
comment. But when the share issue was announced, the company’s chief
operating officer, Mark Maybank, told the media “no large contradiction”
existed between the two events, noting Canaccord was simply raising
capital for “balance sheet repair.” That’s not how Merrill Lynch analyst
Sumit Malhotra sees it. While excess capital can be a prudent thing to
have in difficult times, he told clients in a research note, the
financing “will clearly be an unpleasant surprise for investors” who,
just days earlier, bought shares after being told Canaccord “does not
need to secure any financing to continue to operate our business” and
that the firm remains “very well capitalized for all operating levels of
As a result of the increase in share
count, Merrill Lynch reduced its earnings per share estimates for
Canaccord in 2009 and 2010 by 10%. That, of course, is nothing like the
haircut ABCP investors will take if restructuring efforts fail.