Investor advocates say a restructuring
plan approval vote is looking to be the only chance left for 1,600
retail investors to try to recover the money they invested in
non-bank-sponsored asset-backed commercial paper.
Brian Hunter, a Calgary-based engineer, has $658,000 of his retirement
savings frozen in ABCP in an account with Canaccord Capital. Hunter says
he's one of about 1,400 retail clients with Canaccord Capital who was
advised to purchase ABCP as an alternative to GICs and other guaranteed
fixed income investments.
Hunter is one of the leaders of a growing group of ABCP investors
seeking to get their money back from Canaccord. Monday's announcement by
the Pan-Canadian Investors Committee for Third-Party Structured ABCP
that protection had been granted under the Companies' Creditors
Arrangement Act (CCAA) makes legal action against the firm virtually
If approved, the proposed restructuring deal would make all of the ABCP
providers and sponsors immune from being sued by note holders. Hunter
says the approval of the CCAA protection makes it impossible to go after
them in the meantime. So unless retail note holders, each of whom gets a
vote, turn down the approval agreement, they will lose all legal rights
to go after their money.
"I had lined up a class-action lawsuit — you have to keep your options
open, and that was absolutely the last resort. I had a lawyer who agreed
to do that, but when I spoke to him this morning, he said he was backing
off because he can't see his way through CCAA and what they have done
there," Hunter says. "It's not just the trusts [we can't sue but]
anybody, including all the banks that sponsored this — which is every
one of them — including DBRS, including Canaccord, including Desjardins.
They have taken the legal rights of everybody away."
If there are lawyers who can navigate CCAA, Hunter says, chances are
they are already employed by the other side.
"I'm trying to find anybody who can represent me in court in Ontario,
and that's not easy because anybody who knows anything about CCAA is
already working with the vendors," he says.
Diane Urquhart, an independent financial analyst and vocal investor
advocate, says by eliminating the legal recourse of investors, the
proposed ABCP restructuring deal essentially protects corruption in
Canada's financial system.
"It was sold without a prospectus, and I would say after having gone
through the scene of the accident that non-ABCP was sold unlawfully into
the whole market," Urquhart says.
To be sure, ABCP was an extremely complex financial product, which is
why Urquhart says advisors who recommended the ABCP at Canaccord can't
fully be blamed for recommending the investment vehicle, since it had
high credit ratings from Dominion Bond Rating Service.
She says there is evidence to suggest ABCP should never have received
investment-grade ratings in the first place because it had a flawed
liquidity agreement backing it.
She points to a Standard & Poor's report from 2002 that outlines that
the liquidity agreement underpinning commercial paper in Canada was
insufficient. In the report, S&P says that liquidity agreements exist in
Canada but that investing requires a "leap of faith" that liquidity will
still be there if a crisis arises. As a result, S&P says it would not be
possible to consider Canadian commercial paper investment grade.
"S&P indicated they had assessed the guidelines from the Office of the
Superintendent of Financial Institutions and they had seen the content
of the liquidity agreement behind the ABCP, and on that basis, they had
determined that it was grossly deficient," Urquhart says. "There was not
sufficient protection to give this an investment grade.
"Because this was short-term paper
funding long-term assets, a liquidity crisis was inevitable, and OSFI
would someday be sorry that they instructed the banks to offer such a
Urquhart says the banks that sponsored and distributed ABCP conduits are
sophisticated enough to have realized this risk.
"I go back to the vendor, the financial institution that had a credit
derivative research team, which likely had PhDs. To me it doesn't take a
PhD to know that you have a flawed liquidity agreement," she says.
The 1,600 ABCP note holders do have the balance of power in the ABCP
approval process, since they represent more than the majority of votes
needed to pass, but the committee overseeing the restructuring has
warned investors that if the deal falls through, investors risk losing
everything. Instead, the committee has urged investors to hold on to the
notes until maturity, at which time they might be able to recover most
of their face value.
Urquhart estimates the majority of investors might get 60 cents on the
dollar of their initial investment if they hold the notes for seven
years. She doubts few, if any, will get all their money back.
"Using the estimated seven-year term of the proposed long-term notes and
knowing how much credit spreads have gone up for AAA investment-grade
credits, I would guess that the new notes will stabilize at 50 cents to
60 cents on the dollar, but all this depends on whether the material
contracts within the trusts are released for independent examination to
experts interested in buying or if indeed there are any buyers amongst
the world's heavily damaged banks, hedge funds and other institutional
investors," she says.
This solution doesn't help the contingent of retirees who invested in
ABCP as a short-term income-generating vehicle — many of these investors
need the money now.
Urquhart believes this could be solved if retail investors were
remunerated by the banks that sponsored the ABCP, which she says is very
costly, but they can afford to do it.
"These were being sold to these customers on the basis of being GIC and
treasury bill substitutes with high credit ratings," she says. "The
investment banks and their bank parents have had the means from the
beginning and even now in light of the current damages to take this all
— including pension funds and government funds — onto their own balance
sheets. [They should do this] because they sold a flawed product."
Filed by Mark Noble, Advisor.ca,