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Frozen paper has lost 40% of its value: RBC


March 24, 2008 at 2:04 PM EDT

When you add it all up, the commercial paper in Canada's frozen $32-billion market has lost more than 40 per cent of its face value because of market conditions, according to one analyst.

While the figure does not represent the amount that investors might recoup from their holdings, it is indicative of the troubles facing the committee that's been working to fix this market.

RBC Capital Markets analyst Andre-Philippe Hardy based his estimate, which he released in a note to clients Monday, on court documents that were recently made public.

They show that a $17.2-billion portion of the market — leveraged super senior swap transactions — were worth about 30 per cent as of March 4, Mr. Hardy noted.

He believes that a further $3-billion portion of the market that's tied to U.S. subprime is probably worth about 20 per cent.

Assuming that all of the other assets underlying this paper are still worth their full face value, that “implies a valuation of 56 per cent for the ABCP,” Mr. Hardy wrote.

Determining exactly how much of their money investors in this paper will recoup is somewhat more complicated, because the restructuring plan for the market involves dividing it up into three types of new investments that will each have different values, because some will be riskier than others.

But Mr. Hardy now believes that National Bank, which holds more than $2-billion of third-party asset-backed commercial paper, could be forced to take a further $300-million pre-tax writedown on its holdings.

That would equate to a 38 per cent writedown. National Bank has currently shaved 25 per cent of the value of the ABCP holdings on its books.

However, Mr. Hardy also pointed out that investment grade debt spreads have tightened since March 4, meaning the commercial paper could be worth more now than it was then.

The committee led by Toronto lawyer Purdy Crawford has come up with a plan to fix this market that involves trading the commercial paper in for longer-term notes. It has said investors should be able to recoup much of their money if they hold those notes until they mature, which could be up to nine years.

Many investors say they can't wait that long, and the committee is hopeful an over-the-counter market will develop so investors can trade their shares soon after the plan is in place.

According to court documents, the committee considered proposals designed to promote liquidity in that market, and had asked a number of Canadian and international financial institutions about establishing a lending facility or contributing to other “market-making initiatives.”

For now, no specific market-making measures are in place that would ensure investors can sell their notes in the short-term.

The committee is hoping that it will bring transparency to the market by giving out full details on the new notes. That, combined with ratings that they believe the notes will receive from DBRS, should be enough to ensure that some investors are willing to buy the notes, the committee believes.

It has so far been unable to convince a second rating agency to rate the new notes.

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