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Caisse faces demands to lead bailout

Proposal calls on Quebec pension fund to backstop notes held by small investors

With files from John Partridge
Friday, April 4, 2008

TORONTO, CALGARY -- Caisse de dépôt et placement du Québec has been asked to play a lead role in a bailout plan of retail investors heading into the weekend, after the ABCP bailout committee received an earful during three stormy days of public hearings.

The dilemma for the Caisse, which is the biggest holder of frozen commercial paper, is it wants to avoid being seen by its own members as subsidizing other investors as the expense of its own.

The possible arrangement would offer much-needed relief to Canaccord Capital Inc. and give it a way to help the 1,400 clients it has who are holding the paper without doing too much damage to its balance sheet.

One likely framework for a deal is to have a big investor, potentially the Caisse, buy up the roughly $400-million of paper that's in the hands of individual investors at what is deemed to be a market price of perhaps 50 cents on the dollar. Then Canaccord, the brokerage whose clients hold much of the paper at issue, banks and other market players could create a fund to top up investors to as close to 100 cents on the dollar as possible.

"That's one type of proposal under discussion," said a person familiar with the talks.

Momentum for a deal to help individual investors has increased since they ratcheted up the pressure by lambasting the $33-billion restructuring proposal put forward by a committee of big ABCP holders in a series of public meetings.

The resistance culminated in Vancouver on Wednesday where most attendees indicated to committee chairman Purdy Crawford that they wouldn't support the deal in an April 25 vote unless someone provided more money.

The support of the individual investors is critical, because they have enough votes to control the fate of the restructuring plan. One of the biggest issues for individual investors is that they will lose money if they try to sell the new notes they receive in exchange for their frozen paper in the open market, where bids are expected to be low in the early days after the restructuring.

Brian Hunter, a Calgary oil and gas engineer and an informal leader of the small investors, 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.

The clear indication that, without a deal for small investors, the restructuring is in serious danger has helped to break of some of the log jams that had slowed talks. Still, sources said no final deal has yet been reached, though an agreement could come as soon as next week.

There are a number of factors complicating the talks. One of the biggest is the sudden appearance of more firms that sold ABCP to their clients.

A first step is to find a buyer for the individual investors' paper, and so far no purchaser has committed. Sources said the Caisse has been approached, as have other large institutional investors.

The Caisse has a big incentive to participate. As the largest single holder of frozen ABCP at about $13-billion, it has the most to lose if the restructuring fails. One issue for the Caisse is it wants to avoid the perception that Quebec pensioners are subsidizing investors elsewhere in the country. But if it got a good enough deal on the paper purchase, the fund could argue it's making a savvy investment.

"La Caisse has a fiduciary duty to always act in the best interest of its depositors," said Caisse spokesman Mark Boutet. "Under no circumstances will it take part in any transaction that would give a financial advantage to a third party at the detriment of its own depositors."

After a buyer is found, Canaccord and other parties to the restructuring would have to decide how much to top up the sale price, with the goal being to get as close to 100 cents on the dollar as possible. Canaccord has said it will participate, but that it cannot fund the whole top-up, and shouldn't have to because it was a dealer that didn't even charge investors a fee for selling ABCP and wasn't responsible for the mess in the market.

Canaccord declined to comment on the talks. "We continue to work diligently for a resolution," said Canaccord chief operating officer Mark Maybank. "We look forward to very near-term resolution of this."

A Toronto law firm hired by about 100 of the estimated 1,800 small investors has decided to pursue another option: soliciting bids from U.S. vulture investors that buy distressed debt. Henry Juroviesky of Juroviesky and Ricci LLP said it has retained financial consultants Blackmore Partners "to seek a sale of our clients' economic interests in their ABCP at the highest value."

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."

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