JACQUIE MCNISH and BOYD ERMAN AND TARA PERKINS
March 28, 2008
A group of Canadian financial institutions is in talks to create a unique market to allow individual investors to recover savings trapped by the asset-backed commercial paper meltdown last summer.
According to people familiar with the negotiations, Vancouver-based brokerage Canaccord Capital Inc. is steering the initiative. Canaccord was the leading seller of ABCP to individual investors in Canada. About 1,400, or 80 per cent of an estimated 1,800 individual ABCP holders purchased the notes from Canaccord.
Many of these retail investors are balking at a court-supervised restructuring plan that calls for ABCP investors to convert the frozen paper into longer-term notes that won't be repaid for as much as nine years.
Canaccord, which also holds a substantial portfolio of ABCP, is working with other major funds and companies holding the notes to create a new market only for retail investors so that they can exit quickly from the investments at minimal losses.
Although retail investors only account for more than $260-million of the total $32-billion of paralyzed notes, they collectively have enough votes to stop the court-supervised restructuring, which goes before investors April 25.
ABCP investors such as Canaccord, the Caisse de dépôt et placement du Québec and Groupe Desjardins have a huge incentive to help smaller investors because most of the value of the $32-billion of frozen notes could be vaporized by margin and collateral calls if the restructuring plan fails.
According to people familiar with the talks, Canaccord's plan calls for other major ABCP institutions to set aside funds which could be used to buyout smaller investors. One person familiar with the plan said a mechanism for pricing the notes has not been finalized but "the plan is to give investors as much of their money back as possible."
Canaccord declined to discuss details of the potential new market.
"We are very actively working on a plan on behalf of our clients," said Mark Maybank, chief operating officer of Canaccord. "We look forward to putting it forward in the near term."
The timing of a solution remains unclear. Ideally, one would be ready for investors by Monday, when Toronto lawyer Purdy Crawford begins visiting major Canadian cities to meet and discuss the broader court-supervised restructuring plan.
Mr. Crawford told the Editorial Board of The Globe and Mail yesterday that he is very sympathetic with the plight of small investors who have seen their savings trapped.
"Some of them desperately need it, there's no question," he said.
The biggest challenge facing Canaccord is support from other big players.
As an independent brokerage, it doesn't have the capital to fully make its clients whole. The brokerage also doesn't feel that it should have to shoulder full responsibility for the ABCP meltdown.
The obstacle Canaccord faces is that other major ABCP holders such as Quebec pension fund Caisse de dépôt is worried that it would face a backlash from its own pension clients if it comes to the aid of other investors. The market value of the notes has fallen during the current credit turmoil, prompting many major investors, including the Caisse, to announce writedowns.
Despite the obstacles, the financial logic of Canaccord's proposal is compelling.
"I'm not worried about $200-million blowing up a $33-billion restructuring," said one person close to the discussions