Investors Scrutinizing the Regulators

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ABCP bailout angers larger investors


Thursday, April 10, 2008

Corporate investors who say they have been shortchanged by a $32-billion ABCP restructuring proposal intend to ask the judge overseeing the effort to give them a veto in the process, which took a major leap forward yesterday when Canaccord Capital Inc. unveiled a plan to ensure most individual investors see a full return of their money.

Canaccord, a brokerage that sold asset-backed commercial paper, said it has arranged a buyout for 1,430 of its clients who hold less than $1-million apiece at 100 cents on the dollar. That generated cheers from many investors and may ensure majority support for the proposal in a key vote scheduled for April 25.

However, the Canaccord buyout plan doesn't include 28 corporate holders and 15 individual investors with more than $1-million of the paper in accounts at the firm. Instead, the big corporate holders will be eligible for loans secured by their holdings. Similarly, National Bank of Canada bought out smaller holders last year but investors, many of whom were corporate clients, were only offered loans as compensation if their holdings were worth $2-million or more.

The fact that smaller holders are getting bought out at par has left corporate holders fuming at what they view as lesser treatment.

It has them planning court challenges that could hold up the restructuring plan engineered by a committee of big ABCP investors, such as the Caisse de dépôt et placement du Québec.

"The restructuring as it's currently proposed does not give a fair shake to our clients, and we either need it significantly amended or it needs to be set aside and the committee needs to go back to the drawing board," said Peter Linder, a Calgary lawyer who is representing seven oil companies saddled with frozen ABCP.

While most corporate investors have more money at stake than retail investors, the financial institutions that sold them the notes have less incentive to bargain because corporate holders lack the same leverage. Retail investors represent the largest group of ABCP investors with an estimated 2,000 holders and can control the restructuring vote, forcing banks and other institutions that would be hurt if the restructuring plan failed to play ball.

The number of corporate holders is much smaller, giving them little sway in the vote. Yet companies such as New Gold Inc., Redcorp Ventures Ltd. and Universal Uranium Ltd. have hundreds of millions of dollars locked up since the ABCP meltdown in August, forcing them to scramble for alternative financing arrangements to pay their bills.

Some corporate holders are considering launching lawsuits against those who sold and structured the troubled notes.

Others plan to ask Mr. Justice Colin Campbell of the Superior Court of Ontario - who is presiding over the restructuring - as early as today to declare the corporate investors a separate class of creditors, giving them more leverage because the restructuring could not succeed without support from a majority of the corporate class.

"They feel left out of the process, and rightly so," said Colin Kilgour, an adviser to corporate holders as well as to Canaccord clients. "The mega-investors have been looked after because they built the [restructuring] plan and the micro-investors are for the most part looked after. Now you've got the guys in the middle saying, 'This absolutely doesn't work for us. We don't have the luxury of time, we need the cash to run our business, and no one's going to step up and buy us out, so what are the options available to us?' "

Universal Uranium, with $1.4-million of frozen ABCP it bought from Canaccord, will "probably have to search out an attorney, see what our rights are," executive vice-president Bill Galine said. "I'm shocked that they wouldn't take care of everybody at Canaccord." Canaccord said it didn't have the wherewithal to do a deal for all its clients.

"We worked very hard on this and we certainly tried to put a perfect bow on this and get to 100 per cent [of our clients], but the best we could do was to get to 97 per cent," said Canaccord chief operating officer Mark Maybank.

The current proposal to buy out small holders will cost $138-million, with about 40 per cent coming from Canaccord as a "top up" and 60 per cent from an unnamed group of investors assembled by Royal Bank of Canada that will buy the paper. Adding the bigger clients would have almost doubled the total cost.

"For most of the Canaccord folks it's a very good thing," said Brian Hunter, an Alberta Canaccord client and a de facto small investors' leader. "They've certainly left a few folks out there that are probably going to be very unhappy."

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