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ABCP restructuring will happen 'one way or another': Purdy Crawford

John Greenwood

Monday, December 17, 2007

Allen McInnis/CanWest News ServiceDespite failure to meet a Friday deadline, Purdy Crawford is confident that the committee will be able to work through the ABCP crunch by the new January deadline.


Holders of $33-billion of seized up-asset backed commercial paper who opt not to support a proposed restructuring of the notes will be left to fend for themselves, warned the head of a committee overseeing the plan.

The proposal, which has yet to be fully mapped out, must be approved by at least 66% of noteholders in each of 21 frozen trusts for the restructuring to go ahead. But if some trusts fail to win the required support, those investors "would be on their own," Purdy Crawford said in an interview.

In other words, the investors would have to fight it out with other creditors for a share of the remaining assets in what would likely be a forced liquidation of the trust - hardly a hopeful scenario.

Allen McInnis/CanWest News Service

Despite failure to meet a Friday deadline, Purdy Crawford is confident that the committee will be able to work through the ABCP crunch by the new January deadline.


But some may decide that the alternative is no better, since it is expected that noteholders who sign on to the restructuring will be required to give their right to go to court to recover losses, which could exceed 50% for some trusts.

Mr. Crawford made the comments this weekend after his committee missed a key Friday night deadline for coming up with a restructuring plan to put before investors. Backers of the so-called Montreal proposal have agreed to a new deadline of Jan. 31.

However, this is the second time the committee has had to ask for more time, and observers say the delays could erode support for the restructuring, causing some noteholders to try to turn to the courts to get their money back.

One of the most serious challenges facing Mr. Crawford's committee is the quality of the assets underlying the illiquid ABCP.

Of the $33-billion of assets held by the trusts, only $3-billion is traditional debt such as auto loans and credit card obligations. According to information released by Mr. Crawford's committee, a further $3-billion is subprime mortgages and the remaining $27-billion is a combination of leveraged and unleveraged collateralized debt obligations (CDO).

Because of the market turmoil, many of the CDOs held by the trusts have lost significant value, triggering margin calls.

In normal times, the trusts meet those calls by issuing more notes. But in the current environment that would be almost impossible, even for a restructured trust. The Crawford committee is trying to persuade the Big Five banks to take responsibility for putting up cash to cover margin calls. He is getting support from the Bank of Canada, which is said trying to persuade senior management at the banks.

But sources said the banks are reluctant to take the risk, particularly at a time when they have already been hit by deep losses on subprime investments. Negotiations between the two sides reached an impasse on Friday as the banks dug in their heels. They say they shouldn't have to shoulder that responsibility for margin calls because they did not create the ABCP.

"Why should we have to take all that risk," said a senior investment dealer at one of the banks. "We might as well just buy all the notes."

Mr. Crawford declined to discuss the details of the matter, but he indicated that he believes that it can be resolved.

"Various banks have different motives for participating [in the restructuring]," he said. "All I can tell you is that they are now fully engaged at a senior level."

The issue of collateral calls is crucial because if they can't be met, the CDOs would get unwound, with noteholders losing most of the value of their investment.

The ABCP market broke down in early August after issuers were unable to roll over maturing notes and emergency liquidity providers declined to step in. A group of financial institutions led by the Caisse de dépôt et placement du Québec launched the so-called Montreal proposal on Aug. 16, under which the stalled ABCP would be converted into longer-term notes. But they have yet to map out a way to do that.

The restructuring negotiations are taking place against against the backdrop of a worsening global credit crunch. Last week, the U.S. Federal Reserve, the Bank of Canada and three other central banks injected a total of $110-billion into money markets in a bid to free up liquidity and restore confidence in the financial sector.

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