March 14, 2008 at 9:31 AM EDT
Toronto — The group of investors and banks working to restructure Canada's frozen $33-billion asset-backed commercial paper market is one step closer to a solution after all players signed off late Thursday night on a proposal that's set to go before a judge as soon as Friday morning for approval.
All the players in the contentious negotiations agreed on terms of a deal late last night, sources said. Canada's big banks have all agreed to back a credit line to support the restructuring, one key to the proposal.
While a framework had been in place for months to swap the frozen paper for new longer-term notes worsening credit markets made it tough for all the parties involved to agree on how exactly to do it.
Now, with time running out before a standstill agreement that kept peace between the players expires at midnight, the restructuring committee will ask a judge to sign off on the plan.
JP Morgan, the investment bank that is advising the committee, has prepared estimates of the values of the assets underlying the ABCP, which average about 80 cents on the dollar, sources said.
However, it's unlikely that the new notes will fetch that much in the open market after the swap, which could happen as soon as May. That means holders who are looking to sell the new notes and free up cash that has been frozen since the ABCP market seized up in August will be looking at sizable losses.
The committee's official spokesman was not available to comment Friday morning.
The support of Canada's big banks was one of the final issues that had to be nailed down. Toronto-Dominion Bank had balked at the idea of being involved with the credit line, saying that it didn't sell affected ABCP so it shouldn't be required to help. Similarly, Bank of Montreal was leery of participating because the bank is dealing with potential losses on other areas of its balance sheet and was looking to conserve capital.
However, both came to the table.
“We have been firm in our support of stability in the Canadian commercial paper market,” said BMO spokesan Paul Deegan, who confirmed his bank's participation.
TD spokesman Simon Townsend declined to confirm his firm would be involved, saying Thursday that while TD was participating in talks and those had been productive, “until the committee finalizes its plan, I'm not in a position to comment.”
With files from Tara Perkins.