Investors Scrutinizing the Regulators

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Fox Guarding the Hen House




Holders will get to vote on plan, BoC chief says

Carney keen on ABCP deal

BY Jacqueline Thorpe and Jim Middlemiss


Friday, March 14, 2008


Mark Carney, governor of the Bank of Canada, yesterday gave his stamp of approval to “difficult” efforts multiple players have made to hammer out a deal in the non-bank asset-backed commercial paper market.


A deal to end the crisis in the ABCP market was hammered out last December and the Financial Post reported on Wednesday that papers are set to be filed in court this week seeking a judge’s approval of the implementation of the restructuring package.


“We favour the process,” Mr. Carney said. “It has been difficult, it has been complicated, it’s taken longer than people might like but by putting in place the standstill I think the major participants (investors, asset providers, liquidity providers, agents of the paper) avoided the fire sale and very low returns for investors on this paper and set in place a process which has created the possibility of substantially higher recoveries.”


Most importantly, investors will get a chance to vote on the deal, Mr. Carney said.


He said he was not going to comment on the precise deadline of the deal as he did not know if it was today.


Mr. Carney made the comments in an interview with the Financial Post yesterday after his first major speech on Bay Street in Toronto.


A source has indicated the court hearing could take place as soon as this morning, but has not indicated what type of filing it will be.


Lawyers familiar with corporate restructurings said a filing under the Bankruptcy and Insolvency Act (BIA) or the Companies Creditors Arrangement Act (CCAA) could be possible since both of which allow creditors to vote on proposals to fix the broken entity.


If either such action is taken, by dollar value, it would be the largest insolvency action in Canadian history.


“The CCAA process is entirely court-driven and also more flexible, and you can therefore work around problems,” said Brian Childs, a lawyer with Davis LLP in Vancouver, though he notes it can be more expensive than a filing under the BIA. The BIA is like a strict code with a specific time frame and process, he said. “You don’t have that flexibility.”


At a press conference after Mr. Carney’s speech, he said the securities that will come out of the restructuring are unlikely to meet criteria the bank has set out as it considers accepting ABCP as collateral under its proposed new borrowing rules.


The non-bank ABCP has been frozen since August after the U.S. subprime market blew up and financiers were unable to roll the paper over to new customers and return cash to existing shareholders. Court approval would negate possible legal action and should smooth the way for issuing investors new notes and creating a secondary market in the debt.

The ABCP deal would allow the Canadian market to at least partially avoid some of the “mark to market” issues that has been bedeviling global credit markets as banks try to get a handle on the extent of the subprime taint on their balance sheets.


Markets are so illiquid a lot of securities are being sold at ridiculously low prices, which is creating a vicious cycle of forced selling.


In his speech Mr. Carney noted some have questioned the utility of requiring mark to-market valuations of all assets and liabilities on a corporate balance sheet.


“The point can be made that, in the current circumstances, existing accounting rules provide a degree of precision that is not warranted,” he said in his speech.

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