Investors Scrutinizing the Regulators

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Small investors buy in as big companies balk


BOYD ERMAN AND TARA PERKINS

Monday, April 21, 2008

Small asset-backed commercial paper investors are voting overwhelmingly in favour of a $32-billion restructuring plan for the frozen market, even as corporate holders challenge the proposal in court.

Early returns of proxies for the vote on the plan show that at least 1,100 of the estimated 2,000 small holders have said yes to the plan, which requires a majority vote to pass, sources said. One person familiar with the restructuring said that as of yesterday there were no votes against the proposal.

Retail investors are flocking to vote yes after Canaccord Capital Inc., which had about 1,400 clients with frozen paper, and Credential Securities, which had about 300 affected clients, unveiled plans that would see almost all small holders get full repayment, assuming the overall restructuring proposal passes a vote that is to be completed on Friday.

Many corporate holders of asset-backed commercial paper (ABCP), however, are fighting the plan in court, with hearings beginning today. They include Barrick Gold Corp., Hollinger Canadian Publishing Holdings Co. and Jean Coutu Group Inc. In addition to putting the corporations at loggerheads with smaller investors, that position is pitting them against some of the biggest banks in Canada and abroad.

The stakes are high. The corporations are not getting back as much money as smaller investors under the restructuring and associated bailouts by ABCP-selling banks and they argue that if the proposal proceeds as planned, they will lose their right to sue for any losses. Some companies are already suing – First Quantum Minerals has launched a suit against HSBC PLC's Canadian unit for selling the paper.

The banks argue that changing the deal in the ways that the corporations want would cause the whole restructuring to fall apart, leading to massive losses for all investors.

“The result of a failed restructuring would be extremely detrimental to Canadian capital and credit markets and would seriously and negatively impact a significant sector of the Canadian investor community,” the Canadian banks said in a joint court filing.

The corporate clients don't have the numbers to stop the restructuring in the vote, leaving them with only the courts as an option. Every holder of commercial paper receives one vote on the plan, regardless of whether they hold $1,000 of ABCP or $1-billion, leaving small, individual investors with the power to sway the vote.

A common theme in the court challenges is that corporations want the vote delayed and they want the ability to vote on the restructuring as a separate class, which would give them leverage. If the creditors were divided into separate classes, each one would have to approve of the plan in order for it to pass.

Companies also want to retain the ability to sue companies that sold and created the paper, a right that would disappear under controversial legal releases that are part of the restructuring plan.

For example, HSBC would become immune to the lawsuit from First Quantum over the paper. HSBC spokesman Edward Yee declined to comment on First Quantum's allegations, but said that the bank “has honoured all of its contractual obligations and will vigorously defend itself against any lawsuit.”

Hollinger, meantime, is urging that almost every player in the ABCP market, including Canadian banks and rating company DBRS Ltd., should not be protected from lawsuits. Hollinger, a subsidiary of Sun-Times Media Group, states in court documents that it should be free to take legal action against Canadian Imperial Bank of Commerce, from which it bought $48.2-million (U.S.) of third-party ABCP.

Canada's five largest banks – Bank of Montreal, CIBC, Royal Bank of Canada, Bank of Nova Scotia and Toronto-Dominion Bank – oppose the corporate challenges. So do some of the biggest foreign banks, including Bank of America, Citigroup Inc., HSBC PLC and Deutsche Bank AG.

The Canadian banks argue that their participation in the plan is “entirely contingent” on having protection from lawsuits.

The foreign banks, who mainly played a role as counterparties to some derivatives transactions backing the ABCP, argue that changing the proposal is not possible and that the legal releases are crucial. The foreign banks “are not obliged to and would not support a plan amended in the way proposed” by corporations that have lodged motions, the foreign banks said in court papers.

© The Globe and Mail

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