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Small investors get equal voting rights in ABCP restructuring, committee says

Mon Mar 17, 8:48 PM

By David Friend, The Canadian Press

TORONTO - A plan to restructure $32-billion worth of asset-backed commercial paper will give both small and large investors equal voting rights in the process - a move that observers say was widely unexpected.

On Monday, the Pan-Canadian Investors Committee for Third-Party Structured ABCP was granted an application at the Ontario Superior Court for bankruptcy protection under the Companies' Creditors Arrangement Act.

The action not only protects the notes from default notices or potential lawsuits, but requires the committee's plan to be approved by a majority of noteholders at a meeting scheduled for next month.

Toronto lawyer Purdy Crawford, who heads the committee, said Monday there will be one vote for each noteholder, no matter the size of their holdings.

"It is easy to realize we've moved much more to fairness than normally would be the case," Crawford said in a conference call with the media.

"We are really committed to do everything we can help individual or small investors. We think this will be a great process and everyone will benefit from it."

Crawford said how much investors will get back if the plan is approved will depend on market conditions.

"If things stabilize in the next few months, the chance of recovery will be much greater, but I wouldn't want to say that everyone is going to get all their money back at maturity," Crawford said.

"I understand many investors have suffered hardship and anxiety as a result of the freezing of their investments. We are very sensitive to the plight of these investors. We want to avoid having the noteholders endure more anguish than is necessary."

Noteholders will have a month to look over the details in documents that will be available on the Ernst & Young website once finalized, and mailed out to noteholders "in the next few days," the group said.

A vote will then be held in late April and, if noteholders approve the plan, another hearing will be held at the court to finalize it.

Daryl Ching, a managing partner at Clarity Financial Strategy who had criticized the committee for leaving smaller investors out of the earlier talks, called the voting process "a big change from what we originally thought."

Ching, said he and several small investors, were concerned that their voice would be overpowered by the bigger firms, like Caisse de depot, a large holder of ABCP.

"Before I would've said the committee already has a rubber stamp and this is just an exercise in futility to give the impression that people have a vote," he said in a phone interview.

"Now after reading this I'm saying (to small holders) your vote does matter. You need to review the restructuring plan carefully and you need to make a careful decision."

The federal act is normally used by insolvent companies seeking to continue operations under court protection while working out a new business plan acceptable to its creditors.

In this case, the CCAA would be applied to 20 trusts set up solely to hold asset-backed commercial paper, a short-term investment vehicle backed by underlying assets such as car loans, credit card receivables and mortgages.

ABCP was used by investors as a presumably safe place to park their cash and receive interest slightly above what would be available from ultra-safe government treasury bills.

When the U.S. subprime mortgage market crumbled last year, demand for ABCP suddenly dried up in August and redemptions became impossible because many were backed by the troubled mortgages.

Companies were unable to get their money back when the $32 billion market froze up while investors debated how to value the securities.

Smaller retail investors have been hit hardest by the failed commercial paper, with some having to sell off assets because their money was locked up in ABCP.

The documents "may come out and say 'your notes aren't worth that much' but at least it's something because right now we have nothing - and they have nothing," said Colin Kilgour, an independent consultant on ABCP.

Observers have suggested that some investors could launch lawsuits after becoming impatient with the process, though the creditor arrangement protects the notes from any default notices and lawsuits.

The initiative headed by Crawford has been struggling to get off the ground for months, partly because some of Canada's biggest banks hadn't fully committed to a $14 billion line of liquidity that could be drawn on if further problems erupt.

To date, the committee has secured 98.5 per cent of those funding commitments.

Crawford commented on the timing of the process Monday, saying turmoil in the markets is in part to blame for delays.

"I know the process has appeared to have been painfully slow, but I believe we can obtain a timely and fair resolution to the CCAA course of action," Crawford said.

"I believe it is the best alternative to minimize harm and maximize recover for all investors."

Crawford said meetings will be held with investors across Canada before the vote next month in such cities as Montreal, Toronto, Edmonton, Calgary and Vancouver.

Late Monday, The Toronto-Dominion Bank (TSX:TD), which had no exposure to the non-bank ABCP market, confirmed it will provide financial support to the agreement, saying its participation will not be material.

"We have always said that we would be part of a solution if our participation was needed to resolve this issue and did not involve significant risks to our shareholders and customers," said Ed Clark, president and CEO. "The Pan-Canadian Committee's ability to reach an agreement is a positive step forward in contributing to a solution that brings stability to this market issue."

Finance Minister Jim Flaherty also said in a statement Monday he was happy with the committee's work.

"Since the standstill began last August, the Government of Canada has encouraged a market-led restructuring as a better course of action for investors, other participants and capital markets than a fire sale of assets," Flaherty stated.

"The global conditions that led to the standstill continue to pose risks and challenges in financial markets."

He also commended Crawford and the committee "for their commitment and perseverance amid uncertain times."

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