Foreign banks set deadline for ABCP deal

Foreign banks set deadline for ABCP deal

BOYD ERMAN
December 18, 2008 at 8:35 PM EST

TORONTO — Foreign banks that are crucial to the success of the asset-backed commercial paper restructuring are pressuring Ottawa and the other players involved in the $32-billion plan to finish it by Monday or face the possible failure of the deal and huge investor losses.

Ottawa is in talks with Ontario, Quebec and Alberta about putting up as much as $9.5-billion in credit lines to finalize the restructuring, but there has been no signal of support.

The foreign banks, which include Citigroup Inc. and Deutsche Bank AG, sent a strong message Thursday that if a deal isn't finalized, they may pull their support for the plan to swap the frozen ABCP for new bonds. That would trigger losses of $25-billion or more for investors across Canada who have been holding the seized-up short-term bonds since August, 2007.

The banks told the judge overseeing the plan that once midnight tolls tonight, they can't promise not to start unwinding the derivatives behind the paper.

With markets closed for the weekend, that effectively sets Monday as the deadline.

The foreign banks “are not agreeing to stay their hands past that time,” their lawyer, Peter Howard, said in court Thursday, adding that on Monday one option is “the unthinkable.”

While the banks will act in a “responsible” manner, “time is exceptionally short,” he said.

The push comes because of year-end requirements for financial reporting. With so many holidays in the final two weeks of the year, Monday is basically the last day when a deal could be finalized in time for 2008 financial statements.

There's also concern that some of the foreign banks, a group that has collectively stuck with the restructuring process through changes of management, nationalizations and mergers, may lose patience with the 16-month process and decide that if there has to be losses from ABCP, it's better to scuttle the deal and take them in what has already been an awful 2008 so 2009 can start fresh.

Under the plan put forward by the investor committee overseeing the restructuring a week ago, governments would have to commit to put up money should credit markets go into another vicious slide.

Sources said Ottawa is seeking to have the provinces shoulder about 40 per cent of the load.

There's also likely to be more concessions sought from big ABCP holders such as the Caisse de dépôt et placement du Québec and National Bank of Canada.

A spokesman for Finance Minister Jim Flaherty declined to comment.

If governments came up with only part of the $9.5-billion, sources close to the negotiations said they were optimistic that the deal could get done.

Should the federal and provincial governments give an outright no, it wouldn't necessarily mean the end. The restructuring committee could choose to fall back on a previous iteration of the deal that didn't call for government credit lines, which Mr. Howard said the foreign banks would support.

The problem with that plan, sources said, is that the new bonds would have low credit ratings and would still be vulnerable to seize-ups in credit markets.