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ABCP investors face new hurdle

Court approval of bankruptcy application would lead to further delays; Campbell expected to hear bid


March 17, 2008 at 3:47 AM EDT

Investors holding $33-billion of stranded asset-backed commercial paper (ABCP) are faced with further delays and reduced investment recoveries as the largest restructuring operation in Canadian history shifts to the courts.

A committee of investors that has been seeking since August to revive the troubled short-term notes will ask a Superior Court of Ontario judge as early as today to take control of the rescue and grant the notes protection under the Companies' Creditors Arrangement Act.

If the court application is successful, assets such as mortgages and car leases linked to ABCP will be protected from default notices, lawsuits and other potential claims until a restructuring is approved by the courts.

Technically there is no provision under CCAA for the courts to grant bankruptcy protection to the 20 trusts that issued the notes.

But people familiar with the plan of arrangement that is set to be filed in court said that it calls for the ABCP trusts to be converted into corporations, which are eligible for bankruptcy protection.

"The money and scale of the problem here is so large that the judge will bend over backwards to accommodate the committee," said one person who is familiar with the plan.

It is understood that Mr. Justice Colin Campbell has agreed to preside over the case.

The planned court filing is a devastating setback for investors and the committee of high-powered investors led by Toronto lawyer Purdy Crawford who had sought a consensual solution to a crisis triggered by the meltdown in subprime mortgages.

The so-called Crawford committee had hoped to unveil last week detailed terms of a workout that was designed to convert the short-term notes into long-term bonds that the committee predicted would ultimately repay virtually all principle owed to investors.

The centrepiece of the plan was a $14-billion line of liquidity that was to be funded by a group of Canadian and international banks.

Sources close to the committee said the complex plan started to go off the rails in late February when deteriorating global credit conditions triggered a fresh round of fears that banks would be hit with more losses and have less money to lend. Although the committee had assurances from Canada's Big Six banks that they would contribute $2-billion to the $14-billion liquidity line, sources said one Canadian bank kept delaying its formal approval.

The committee ran out of time to wait for the tardy bank Friday night when a standstill agreement with investors expired. With nothing stopping investors from declaring defaults on their troubled ABCP, the committee had no choice but to seek court protection this week. "It was a Kafkaesque experience," said one person familiar with the discussions.

People close to the Crawford committee have privately advised some major ABCP investors that they now only expect to repay an average of 80 cents on the dollar for the frozen ABCP under a plan of arrangement that is expected to be filed in court. "They have been telling us to be patient and now the scenario is not nearly as good as it was even three weeks ago," said one adviser to a group of investors who declined to be identified.

In December, the Crawford committee had promised investors the restructuring would be completed by the end of April. It is doubtful the deadline can be reached now that the issue is being moved to the courts.

Some legal experts predicted the restructuring could become entangled in court battles for months as various investors jockey to assert their rights. Some investors own notes backed by assets more financially sound than assets backing other series of ABCP notes. Holders of these stronger notes may seek to claim the underlying assets separately, rather than participate in a group restructuring.

Another potential source of dispute may arise over voting rights. ABCP investors include individuals, corporations and many of the banks that played multiple roles structuring, selling and lending money to the ABCP trusts. Some investors said they would oppose giving these banks voting rights in a restructuring because of their conflicting roles.

Frozen money

Jill O'Hara has $250,000 tied up in frozen commercial paper and can't wait much longer for it.

"I'm going to lose my house in less than six months," the 52-year-old Victoria resident said.

Ms. O'Hara sold a condominium last year and was in the process of buying a house. She needed a place to invest her money temporarily, and it wound up in third-party ABCP, where it was supposed to earn roughly 4 per cent.

"Six weeks later, when I went to buy my house, the money was frozen and I couldn't get it back," she said. "On top of a mortgage and all those things, I'm also hemorrhaging money on ... additional financing and I'm just about out of money," she said. "It's costing me $750 a month."

Ms. O'Hara has filed a formal complaint against her broker with the Ombudsman for Banking Services and Investments, and is waiting the outcome of that before considering any legal action.

She's also frustrated by the lack of input investors have had. The committee has been given the authority to file for court protection, but "they're not representing me personally," or other investors in similar positions, she said.

The ABCs of ABCP

How was this mess created?

Canada's asset-backed commercial paper market was humming along until last summer's U.S. subprime mortgage crisis sent financial markets around the world into a tailspin.

For decades, banks had been pooling bundles of debt such as mortgages and credit card receivables and selling investors short-term notes that earned interest from them. More recently, a crop of other financial firms waded into the mix, spurring the creation of Canada's $35-billion third-party (not sponsored by the big banks) ABCP sector.

When the U.S. subprime mortgage market cratered last summer, investors realized that some of those mortgages had been pooled into these types of assets, causing them to pull out. While the third-party ABCP sector held a tiny proportion of U.S. subprime, it became a casualty when some banks declined to give the commercial paper trusts emergency funds, citing a technicality in the wording of their emergency funding agreements.

What's been done to solve it?

Three days after the sector nosedived, a group of its major players, led by the Caisse de dépôt et placement du Québec, announced a plan to convert the short-term debt into longer-term instruments. To give time to hammer out details, ten institutions agreed to a temporary moratorium that stopped investors from trying to get their money out of the trusts and prevented issuers from asking for funds from lenders. Toronto lawyer Purdy Crawford was brought in to broker a permanent solution. Mr. Crawford's committee missed deadline after deadline it had imposed on itself, and investors who couldn't access their money grew more frustrated. The committee's final deadline had been Friday, and it now hopes to present a plan in court today.

Will investors get all of their money back?

When the committee outlined some details of its plan in December, it said it hoped most investors would be able to get the full value of their paper if they held it to term, roughly seven years. But sources say it's become less optimistic lately, valuing the paper at roughly 80 cents on the dollar. Investors who need to sell the paper in the short term will likely stand to lose more. It's unknown what impact the court proceedings will have on this.

Tara Perkins


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