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Firm invites hedge funds, private-equity groups to bid on frozen notes

John Greenwood


Friday, April 04, 2008

"Time is of the essence. ... We need to expose the truth and save many people from certain disaster. Also we need to discuss the only solution that guarantees payment and not absolute loss which is being promoted ... "

Brian Hunter admits he was taken aback by the tone of the e-mail that recently appeared in his inbox, but even more surprising was the source: A man saying he represents a hedge fund called Orion Capital Trust.

Mr. Hunter is head of a group of retail holders of frozen asset-backed commercial paper who are threatening to kill a proposed restructuring of the market unless they get their money back.

Mostly clients of Canaccord Capital, they own upwards of $300-million of the illiquid notes.

It's a tiny piece of the $32-billion market, but their voting power is enormous.

Many in the group, including Mr. Hunter, are furious because, even if all goes according to plan, they will get only a fraction of their money back.

But the e-mail writer had a solution. Chris Van Zyl, as he identified himself, proposed Mr. Hunter's group would "lend" out its frozen investment to his hedge fund, including the voting rights.

If they did so, Mr. Van Zyl promised they would get as much as 95% of their money back "returned to clients in under 16 months."

Whether or not the offer is genuine doesn't matter that much, according to Mr. Hunter, since it is only the latest evidence that hedge funds and other opportunistic investors are hungry to take advantage of the beleaguered restructuring of the Canadian ABCP market.

Mr. Hunter's group now has a proposal of its own.

Yesterday, Juroviesky and Ricci LLP, the law firm representing retail investors, issued an invitation to private-equity groups and hedge funds with an interest in distressed debt to start tabling offers for notes held by their clients.

"We felt that in order to maximize value for all our clients, we needed to look at creative ways to enhance the value of their notes," said Henry Juroviesky, the managing partner.

So far, "more than two expressions of interest" have been received, according to the firm.

David Weiner, a spokesman for the committee of investors that is spearheading the restructuring, said he welcomed the move. "We would welcome any initiative to find an acceptable solution for retail investors," he said, adding he was skeptical that the group would get "100 on the dollar" from such an arrangement.

The lion's share of the frozen notes are held by institutions such as Caisse de depot et placement du Quebec and other big pension funds. However, the most pivotal group, at least for the moment, is more than 1,800 individual investors. They were virtually ignored by the Caisse and other major holders last year when they began plotting out strategy to rescue the ABCP market. However, when the workout was pushed into bankruptcy protection last month, individual holders were given a voice as part of the legal process of the Companies' Creditors Arrangement Act.

That put Mr. Hunter and his group in the drivers' seat.

Ever since the restructuring was first proposed eight months ago, insiders have warned of the possibility opportunistic hedge funds might take advantage of the process, potentially hurting all note-holders.

The worry is that they might prevent the restructuring and force a fire sale of the assets backing up the frozen paper.

That scenario has suddenly become a lot more likely as retail investors face off with the institutions that are backing the restructuring in what some observers are calling "a game of chicken."

"No one wants this thing to get pushed to the brink," said a senior executive at a company with several million of frozen ABCP on its books.

There is plenty of evidence that cunning investors are circling the beleaguered restructuring of the Canadian ABCP market.

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