Investors Scrutinizing the Regulators

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Fox Guarding the Hen House




Uncertainty gathers over ABCP fix




Monday, March 3, 2008


Storm clouds are once again gathering over the restructuring of Canada’s frozen assetbacked commercial-paper market amid reports that the backers have been unable to agree on a key standstill deal because of the unfolding crisis in the credit markets.


The decision to extend the standstill “is just rolling day by day,” said a source close to an investors committee overseeing the restructuring.


International banks and others involved in the talks are reluctant to commit themselves any longer than that because of unprecedented volatility in the debt markets.


According to Andre-Philippe Hardy, an analyst at RBC Capital Markets, spreads on North American investment grade debt have jumped to 165 basis points, more than triple since August when the ABCP market seized up.


“The destruction of value since this thing began has been massive,” said Colin Kilgour, a securitization expert in Toronto.


Meanwhile, Purdy Crawford, the Bay Street lawyer leading the investors committee, has predicted that the new restructured notes investors would receive in exchange for their ABCP will likely trade “at a significant discount to par.”


In an e-mail to a group of retail investors on the Facebook social-networking Web site, Mr. Crawford said that while investors will likely get their money back if they hold the notes for the seven years it takes them to mature, trying to sell them in the interim will probably result in losses.


Brian Hunter, an engineer and ABCP investor who set up the Facebook site, said he contacted Mr. Crawford after one of the contributors, a woman with much of her savings tied up in frozen ABCP, said she was suffering extreme emotional duress.


“I told him we had serious problems,” said Mr. Hunter, in an interview from his home in Calgary. “You do what you can and I spoke to her, but I’m an engineer for Christ’s sake. We’re not the most sensitive animals.”



Purdy Crawford

Mr. Hunter, who is retired, estimates he has about $600,000 tied up in ABCP, a big chunk of his net worth. Among the members of his discussion group there are more than 40 small investors with exposure to the frozen notes, but he says that’s just a guess because he has met only a few.


“There’s a lot of folks out there with significant investments in the stuff,” he said.


The $35-billion market for ABCP fell apart in August after issuers failed to roll maturing notes and the banks that have undertaken to provide emergency liquidity declined to step in.


A group of financial institutions and major investors launched a restructuring plan known as the Montreal Proposal that was originally supposed to be completed by the end of December. But seven months later, the negotiations are still ongoing. On Friday, Mr. Crawford’s committee revealed that the completion of the restructuring has been delayed until the end of April. Many observers are skeptical even that date can be met. The main hurdle is crisis in the credit markets, which has forced financial institutions around the world to swallow massive losses.


A report from RBC’s Mr. Hardy speculated that one of the foreign banks that is a major creditor to the frozen ABCP trusts “has apparently become more nervous” and is no longer supporting the restructuring. If that is the case, “it could derail the restructuring,” he said in a note last week.

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