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
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
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