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Legal wrangling intensifies over asset-backed commercial paper restructuring

Tuesday, 2008-04-22

David Friend

TORONTO - Lawyers for various corporations thronged an Ontario Superior Court hearing Tuesday, arguing over whether the judge has jurisdiction over an effort to restructure $32 billion worth of frozen asset-backed commercial paper - and if he does, whether he should amend, delay or reject the plan.

It was standing room only as dozens of lawyers crowded into the largest courtroom at the downtown building, arguing over the plan laboriously developed by a committee backed by large holders of non-bank ABCP that seized up in August.

The plan is based on replacing the short-term notes with long-term debt reflecting the maturity of the underlying assets, enabling big institutions such as the Caisse de depot et placement du Quebec - the country's biggest pension manager - to avoid massive writedowns and retain hope of eventually recouping all or most of their money.

At the same time, investment dealers that sold ABCP to small investors have undertaken to make sure that holders of less than $1 million worth of the notes will soon receive their full principal back.

Stuck in the middle are corporations and wealthy individuals who urgently need millions or tens of millions of dollars they placed in now-crippled ABCP. They are asking Justice Colin Campbell to declare them a separate class of investor, giving them more influence in the proceeding under the Companies' Creditors Arrangement Act.

Investors are scheduled to vote Friday on the restructuring proposal from the so-called Pan Canadian Committee headed by Bay Street lawyer Purdy Crawford.

One of the contentious aspects of the Crawford committee proposal is a provision that would prevent lawsuits against banks and securities dealers that sold the tainted ABCP.

Another issue was confusion over the number of votes that corporate clients would receive under the plan, prompting one lawyer to ask for a delay until full disclosure on the value of the assets could be provided.

After hearing from several lawyers, Campbell said he was getting the impression that the corporate representatives wanted to "crater the plan" and scrap the vote.

"That's what I'm hearing time and time again," Campbell said.

Earlier, a lawyer for a group of Alberta-based junior oil and gas companies said two of his clients who invested in the asset-backed investments are on the "brink of bankruptcy." He said that receiving another form of commercial paper rated by the Dominion Bond Rating Service is "not much solace to them or their shareholders."

Also Tuesday, the chief federal banking regulator said Canadians seeking to lay blame for the ABCP seize-up should look elsewhere than at the Office of the Superintendent of Financial Institutions.

Superintendent Julie Dickson stressed that OSFI does not oversee the firms that created non-bank ABCP, nor does it regulate the foreign banks that provided the bulk of the ABCP liquidity lines that choked in August.

"It is important to get to the bottom of what happened and OSFI fully supports these efforts and will continue to provide input into this process," she added.

"There are a number of factors that contributed to the current situation and I believe a fulsome discussion and review are critical."

Dickson said OSFI's role, as supervisor of federally registered deposit-taking institutions, insurers and pension plans, is to promote a sound banking sector in Canada to protect depositors.

But large and small investors in non-bank ABCP - short-term notes based on assets such as car loans, credit-card receivables to mortgages - were outside its purview.

They have found their holdings frozen since mid-August, when the market for ABCP seized up because of fears the underlying assets included collapsing American high-risk mortgages.

The much larger amount of asset-backed commercial paper sponsored by the big Canadian banks was not directly impacted.

OSFI's Dickson said her agency's guidelines set appropriate capital requirements for Canadian banks and clarified securitization structures for buyers of bank-backed ABCP.

"It is clear that capital requirements on Canadian banks did not drive the uniqueness of the non-bank ABCP market in Canada," she said.

At the same time, offshore banks that negotiated liquidity lines for Canadian non-bank ABCP conduits but then refused to step up and buy the notes when the market collapsed, citing a technicality over the definition of a market disruption, "are subject to the capital rules of their home countries."

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