May 6, 2008 at 7:30 PM EDT
Finance Minister Jim Flaherty has taken the unusual step of intervening
in a sideshow spat in the ABCP drama, applying direct pressure on
Canadian Imperial Bank of Commerce to settle up with Barrick Gold Corp.
Sources say Mr. Flaherty's phone call to senior CIBC executives last
week succeeded in bringing the bank to the table in a festering dispute
with its gold miner client.
After eight months of intense negotiations, the success of the
asset-backed commercial paper rescue now hinges on a legal spat between
the two parties that involves less than 1 per cent of the total troubled
notes at stake. The dispute centres on $65.8-million of ABCP notes,
which is minor compared with the total $32-billion currently frozen, but
the standoff threatens to hold back the settlement process.
Lawyer Terry O'Sullivan of Lax O'Sullivan Scott LLP in Toronto
According to people familiar with the discussions, Barrick's team,
led by Lax O'Sullivan Scott LLP partner Terry O'Sullivan, has
demanded full repayment for Barrick, but the bank has so far refused
“We have been co-operative for months on end,” Vince Borg, a
spokesman for Barrick, said yesterday.
“It's fair to say, at this stage, that our patience is being
tested,” Mr. Borg said. “We have been willing to engage in
discussions but any discussions must clearly lead toward a
Mr. O'Sullivan and CIBC declined to comment.
Regardless of the merits of Barrick's case, this much is certain: CIBC's
foot dragging has brought the ABCP restructuring to the brink. If talks
fail, Barrick could be in a unique position to derail the restructuring
because its case is widely seen as being strong enough to potentially
block court approval of the rescue proposal at a sanction hearing set
for next week.
As the dispute plays out, it is attracting attention not just because
the two parties appear willing to bring the ABCP bailout to the edge,
but also because CIBC has exposed itself to the very public and angry
wrath of a major and long-term corporate client and its globe-trotting
chairman Peter Munk.
It's not so rare for companies to get in fights with their banks, but it
is almost unheard of for a Canadian bank to allow a dustup with such a
prominent company to escalate into a public feud. After telling Barrick
to effectively take a hike, CIBC found itself on the wrong end of a
court motion last month.
An affidavit from Barrick treasurer James Mavor alleges that weeks
before the market collapse last August, an executive director of the
bank “expressly confirmed to Barrick that its [ABCP] investments did not
have exposure to subprime assets.” In fact, ABCP issued by Ironstone
Trust is so loaded with the toxic mortgages that the notes are now
estimated to be worth between 5 and 12 cents on the dollar.
Although no one will publicly admit it, sources say a number of CIBC's
competitors quietly bought peace with some of its most prized corporate
clients by buying back stranded ABCP after last August's meltdown.
More than a dozen companies including Barrick, Transat A.T. Inc., Jean
Coutu Group (PJC) Inc. and Redcorp Ventures Ltd., were not so lucky.
Bankers to these corporate investors apparently made a calculated bet
that either these clients weren't important enough, or they lacked the
firepower to derail the restructuring plan.
So far it looks like everyone except CIBC made a good bet. When
investors were asked to vote on the restructuring proposal two weeks
ago, all but one of the 20 trusts won the majority support needed to win
court approval. The one trust that failed to win sufficient support was
The combination of the failed Ironstone vote and some of the unique
facts of Barrick's case has put the Superior Court of Ontario's Mr.
Justice Colin Campbell, who is overseeing the court restructuring plan,
in a tight legal corner. The centrepiece of the ABCP proposal is a
sweeping legal release that will shield all banks and parties linked to
the troubled notes from any lawsuits. Under the Companies' Creditors
Arrangement Act, judges have been able in previous cases to force legal
releases on opposing investors and debtors when it could be shown that a
restructuring plan provided at least some benefit to all parties.
There are other companies, such as Chicago-based Sun-Times Media Group
Inc., that own Ironstone, but these investors don't have much legal
ammunition to fight the restructuring proposal because they own other,
healthier ABCP notes that stand to be repaid under the plan.
Barrick, however, is the one holder that was misfortunate enough to only
own Ironstone notes. That means the mining company stands to get little
more than fool's gold under the proposed restructuring. And that means
Judge Campbell is going to be on thin legal ice if he forces Barrick to
give up its legal rights to sue CIBC.
Faced with this legal paradox, Judge Campbell dropped some very strong
hints last week that he wants CIBC and Barrick to settle their
differences before he convenes a so-called sanction hearing May 12.
Other challenges stand in the way of a resolution. The biggest danger
CIBC faces is that if it buys out Barrick, it could face a chorus of
objections from other corporate clients holding Ironstone notes. These
investors may not have much of a legal leg to stand on, but any
objections could potentially further slow the restructuring plan.
The other challenge is CIBC's bank partner on Ironstone Trust. Although
CIBC structured and sold much of the Ironstone notes, it was National
Bank of Canada that sponsored the trust when it was launched in
2005. If CIBC is called upon to make Barrick whole on its soured ABCP
investment, it's a pretty good bet that the bank will be asking National
to share the pain.
If that happens, look for the restructuring to drag on beyond the
sanction hearing Judge Campbell has set for next week. CIBC and National
have both already written off billions of dollars of troubled ABCP and
other structured financial instruments. Spending more bank capital on
another soured play is not something that either bank will be eager do
without a fight.
Which is why Mr. Flaherty might want to put CIBC on speed dial.