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Flaherty wades into Barrick's CIBC feud

Dustup threatens to delay ABCP restructuring


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 to yield.

“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 satisfactory resolution.”

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 Ironstone.

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.

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