Investors Scrutinizing the Regulators

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Fox Guarding the Hen House




Retail investors' hold key

Needs backing of more than 50% of noteholders

John Greenwood


Tuesday, March 18, 2008

Retail investors now hold the key to the unfreezing of $32-billion of seized-up asset backed commercial paper following on details released earlier this week concerning what amounts to the largest bankruptcy protection filing in Canadian history.

Among other things, it was disclosed that the key to the success of the restructuring lies with retail investors rather than big institutions because the plan must win support from more than 50% of note holders. Although players such as the Caisse de depot et placement du Quebec hold the lion's share of the affected paper by value, retail investors are far more numerous.

Ever since the rescue known as the Montreal proposal took shape last August, small investors have complained that their interests were being pushed aside in favour of the institutional players. Now, according to Purdy Crawford, the head of an investors committee overseeing the restructuring, their voices will be heard.

However, it was also disclosed that in connection with the restructuring, the banks, investment dealers and rating agencies such as DBRS that created the ABCP will be granted immunity from prosecution as a reward for supporting the restructuring.

"Key participants who are making a substantial and necessary contribution require the releases," Mr. Crawford said in an affidavit. "Simply put, there can be no [restructuring] unless these releases are included, and I believe the benefits of the plan, taken as a whole, justify the releases."

Most of the frozen ABCP is held by organizations such as the Caisse de depot, National Bank Financial and various government bodies. However, investors also include more than 1,600 individuals, many of whom were sold the notes by investment dealers and banks even though they may not have been part of the sophisticated investor category permitted under regulatory requirements to own the securities.

"I went ballistic when I saw the part about the legal release," said a small investor based in Toronto. "I couldn't believe they would let these guys off the hook."

"It's an extreme abuse of investors who were sold a savings product that was flawed," said Diane Urquhart, an independent analyst.

The noteholder vote is slated for the end of April, and observers say that given the ongoing turmoil in the credit markets and the level of investor sentiment, the result may be too close to call, at least for now.

As part of the restructuring, investors will receive longer term notes. Originally, the new notes were to have ratings from at least two rating agencies, but according to Mr. Crawford, they will have just one rating, from DBRS. Given that the bulk of the underlying assets will be highly complex credit default swaps that have fallen out of favour with investors, many observers expect they will trade well below face value.

The decision of whether to support the restructuring is "a bit of a high-stakes poker game," said Colin Kilgour, an industry consultant. "Either investors [support the plan and] take the new notes or they keep the bankrupt ABCP and pursue their legal options."

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