Investors Scrutinizing the Regulators

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ABCP investors seek alternate bids

Thursday, April 3, 2008 at 9:47 AM EDT

Small investors who have an estimated $300-million trapped in the frozen $32-billion market for asset-backed commercial paper are turning up the heat in their efforts to free their funds.

Unimpressed by initial responses from an industry committee trying to craft a solution for lenders and corporate and institutional investors, a Toronto law firm hired by about 100 of the small investors says it plans to solicit bids for the locked-up funds from U.S. private equity and hedge funds known for buying distressed debt.

Henry Juroviesky of Juroviesky & Ricci LLP in Toronto said Thursday the firm has retained Blackmore Partners, a consulting company with established contacts in the hedge fund and private equity market “to seek a sale of our clients' economic interests in their ABCP at the highest value.”

In fact, Mr. Juroviesky said in a statement that Blackmore has already received “preliminary expressions of interest to purchase our clients' interests, and we are expecting these offers to increase as this process gathers steam.”

He said Juroviesky & Ricci has taken this step in an effort “to keep the process honest” after failing in its first attempt to persuade the so-called Pan-Canadian committee to buy its clients' frozen paper “using moral persuasion.”

The committee, chaired by Bay Street lawyer Purdy Crawford, has just wrapped up a cross-country road show designed to persuade the estimated 1,800 small investors who hold ABCP to accept a plan to which the large players have already agreed in principle. It basically involves exchanging their short-term notes for ones that would not mature for as long as nine years.

Getting approval from these small players is critical. Although they hold only about 10 per cent of the total value of the frozen ABCP, they collectively have enough votes to block the majority approval needed for the restructuring plan to win the green light from an Ontario Court.

Mr. Juroviesky said Blackmore has proposed a structure whereby all small note-holders would authorize the law firm to vote their proxies in a voting trust. Whichever fund wins the bidding for the small note-holders ABCP would have the right to direct whether the trust should vote for or against the committee's plan.

Small investors have given Mr. Crawford a rough ride at meetings in Toronto and Vancouver.

Brian Hunter, a Calgary oil and gas engineer who heads an informal group of about 100 investors that hired Juroviesky & Ricci, figures that if the U.S. funds get involved, getting a solution will be even more difficult for the committee.

“Hedge funds, vultures apparently see a wounded animal and are circling waiting for it to drop,” Mr. Hunter told The Globe and Mail in an e-mail Wednesday. “The committee should be concerned that they will no longer be dealing with widows, orphans, seniors and oil and gas engineers. [Instead, they will be] dealing with hedge funds who understand this crap could be a lot tougher.”

Advisers to the committee said yesterday they are also working towards establishing liquid markets for the paper to trade if the plan passes. Aside from the domestic banks and foreign banks with operations in Canada, there are other pools of capital, including hedge funds, that would look at trading the paper, they said.

On a related front, the House of Commons finance committee voted late yesterday in favour of holding hearings into ABCP.

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