Investors Scrutinizing the Regulators

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Fox Guarding the Hen House




ABCP holders told they're welcome to invite vultures

April 3, 2008 at 3:05 PM EDT

A committee trying to persuade small investors to support a proposal to restructure the frozen $32-billion market for asset-backed commercial paper would not object if they sold their holdings to U.S. vulture funds, a spokesman said Thursday.

However, it is unrealistic to expect that such funds would be willing to pay prices the small investors have publicly indicated they would find acceptable for the ABCP they hold, which has a par value of about $300-million, spokesman David Weiner said.

“We would not stand in the way of anyone willing to buy out retail investors at par or par plus accrued interest,” Mr. Weiner said in a telephone interview, following a closed-door meeting in Toronto of the Pan-Canadian Investors Committee. “Many committee members, I suspect, would be delighted if such an offer were forthcoming or realistic.”

Asked how the committee would feel if vulture funds were to offer considerably less than par, which is much more likely, he reiterated that its members would “welcome any initiative that keeps retail investors happy.”

Mr. Weiner was responding to news earlier in the day that, unimpressed by initial responses from the committee, a Toronto law firm hired by about 100 of the estimated 1,800 small investors has decided to solicit bids for the locked-up funds from U.S. vulture investors known for buying distressed debt.

Henry Juroviesky of Juroviesky & Ricci LLP in Toronto said Thursday the firm has retained financial consultants Blackmore Partners “to seek a sale of our clients' economic interests in their ABCP at the highest value.”

In fact, Mr. Juroviesky said 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.”

By contrast, Mr. Weiner said that the committee, which has crafted a restructuring proposal geared to lenders and large corporate and institutional investors involved in the ABCP mess, has not received any expressions of interest from hedge funds. “And given the way these notes are currently structured, that's just not a realistic option,” he added.

Mr. Juriviesky said his firm had decided to pursue U.S. hedge and private equity funds in an effort “to keep the process honest” after failing in its first attempt to persuade the 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 small investors to accept a proposal already agreed to in principle by the large players. It involves exchanging their short-term notes for ones that would not mature for as long as nine years.

A vote on the proposed restructuring is set for April 25, and getting approval from these small players is critical. Although they hold only about 1 per cent of the total value of the frozen ABCP, they collectively have enough votes to block the majority approval needed for a 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 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.

They contend that the committee's restructuring proposal favours large investors, such as the Caisse de dépôt et placement du Québec, which holds $12.6-billion in ABCP, more than any other single investor, over small individual ABCP holders.

Brian Hunter, a Calgary oil and gas engineer who heads the informal group that hired Juroviesky & Ricci, figures the situation will get rougher if the U.S. funds get involved.

“Hedge funds, vultures apparently see a wounded animal and are circling waiting for it to drop,” Mr. Hunter told The Globe and Mail. “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.”

In a telephone interview from Calgary Thursday, Mr. Hunter argued the committee has not explored all the options in what can be done for him and the other retail investors.

He also said his group has already had “a couple of approaches” from U.S. funds, although he added it is unlikely he will do a deal with one of those that have made overtures. He did not identify the funds.

However, he figures these aggressive players might be able to squeeze more money out of the institutions than his group could. “If you get these sharks from the U.S. in here, the Caisse would be scared,” he said.

Advisers to the committee said Wednesday that 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.

Mr. Hunter suggested he's unwilling to accept an offer that would give him less than 90 cents on the dollar, which is his rough estimate of how much he would recover if he were to vote against the committee's plan and sue.

However, the committee has cautioned that any legal actions against brokers or other parties could take years to work through the courts, and result in hefty legal fees for investors. It has also warned that the commercial paper could lose all or most of its value if the plan is defeated.

On a related front, the House of Commons finance committee voted late Wednesday in favour of holding hearings into ABCP, although it has not yet set a date.

Liberal MP John McCallum, backed by Liberal colleague John McKay, proposed holding a three-hour hearing with small investors next week, and further sessions with Mr. Crawford's committee and other players some time after the investor vote on April 25.

However, Conservative MPs on the committee argued no hearings should be held until after April 25 for fear they could have a negative impact on the vote.

“For us to even hear these concerns before that point would be inappropriate,” said Ted Menzies, one of the opponents, adding that there was a risk they could “lead these individuals on.

“This is a private-sector-led process, let's let it work its way out.”

Mr. McCallum disputed these arguments, saying that by hearing from the small investors before the vote, the finance committee could “create a forum to allow an informed discussion [that] will lead to a positive outcome.”

Finance committee chairman Rob Merrifield, a Conservative MP, said Thursday that hearing dates will likely be set when the committee meets again Monday.

He also said that the Liberal, NDP and Bloc Québécois members of the committee have enough votes to insure that a hearing for the small investors be held next week, but like his Conservative colleagues, he argued against doing so.

“I'm hoping cooler heads will prevail between now and that time and that we can perhaps put it off,” Mr. Merrifield said in a telephone interview from Ottawa. “But as the chair, I'm obligated to comply with the majority will of the committee.”

He added, however, that, “the fallout, if there is fallout, will be squarely on their shoulders.”

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