March 31, 2008 at 5:31 PM EDT
The Street is openly calculating the cost of a bail-out for individual investors in frozen asset-backed commercial paper, and coming up with interesting scenarios for Canaccord Capital, a central player in any rescue.
As lawyer Purdy Crawford crisscrosses the country trying to win support for the $32-billion restructuring - he's in Calgary and Edmonton on Tuesday - the game is figuring out just how retail investors are going to be made whole, and who will foot the bill. No where is this more critical than at Canaccord, home to 1,400 of an estimated 1,800 investors with frozen paper, where total exposure to the paper runs to $269-million.
“We believe the [Crawford] committee members will set up a fund to buy the $269-million,” said a report yesterday from TD Securities analyst Doug Young. “Buying $269-million to ensure a $32-billion market gets restructured seems like a small concession, and this could lift a big weight off credit markets in Canada.”
He went on to project what Canaccord, a rival dealer, will contribute to that fund. The TD analyst's best guess is $50-million, though he forecast the bill could run as high as $125-million.
I'm sure Canaccord executives welcomed this input. I'm sure they were also thrilled back in August when National Bank set the precedent here by buying all the frozen ABCP held by its retail clients at 100 cents on the dollar, a $2-billion move.
Now, here's where things get interesting. If Canaccord can keep its contribution to any rescue package under $50-million, Mr. Young figures the dealer can handle the rescue without resorting to financing. If the dealer faces a larger bill, Mr. Young has some ideas on where Canaccord can find capital.
The first door to knock on would be Manulife Financial, which has made a great deal of money in the past taking minority stakes in Canaccord, and “is looking for opportunistic investments,” in Mr. Young's words. Manulife stepped up for CIBC shares when the bank rebuilt its balance sheet in January.
The second place Canaccord could look for money would be the Caisse de depot et placement du Quebec, the largest holder of ABCP and the player “therefore arguably [with] the most to lose if restructuring efforts fail.”
Introducing Manulife, the Caisse or any other financial player as a significant shareholder in Canaccord is going to have a fascinating influence on the future direction of the one of the few remaining independent investment dealers in Canada. Recall the hoops that Dundee Wealth had to jump through after that money manager secured an ABCP bailout from Bank of Nova Scotia.
Obviously, the stakes are high for Canaccord. But they are even higher for retail investors who bought supposedly low-risk commercial paper. There are e-mails showing stockbrokers sold this paper as an alternative to GICs, as a savings product, not an investment product. Most individuals bought ABCP in good faith, and have now seen their savings frozen for seven long months.
Some sort of a retail rescue package needs to be
offered, not just to Canaccord clients, but to
all 1,800 individual investors who hold
$400-million of ABCP. As Mr. Young points out,
the overall risk to the Canadian market and
funds such as the Caisse justifies concessions