Investors Scrutinizing the Regulators

Home Page


Securities Regulation In CanadA

Fox Guarding the Hen House



Canadian Hog Farmers, Pastors May Block C$32 Billion Debt Plan 

By Doug Alexander and Sean B. Pasternak

March 20 (Bloomberg) -- The fate of a C$32 billion ($32 billion) rescue plan for Canada's commercial-paper market rests in the hands of a hog farmer, a pastor and other individual investors like Layne Arthur.

Arthur, who has C$434,000 in commercial paper that's been frozen since August, plans to reject the proposal because he's not willing to give up his right to sue to recover his money sooner. Under the agreement reached March 17, the 30- to 90-day debt will be converted to new notes maturing as late as 2017.

"I'm going to sue,'' said Arthur, 52, who invested proceeds from the sale of his Alberta farm on the advice of his broker, Canaccord Capital Inc. "I want all my money back; you can't sell somebody something and then not deliver on the product.''

Investors like Arthur, who include a university student, energy executives and a retired flight attendant, have the power to scuttle Canada's biggest debt restructuring if they vote against the 324-page agreement.

The plan requires the support of a majority of noteholders, who must forego their right to legal action. Under Canadian bankruptcy rules, the more than 1,500 individuals and at least 100 corporations and money managers who own the commercial paper can vote on the plan.

A defeat of the proposal may lead to a collapse of C$32 billion in asset-backed commercial paper, which is also held by some of the country's biggest pension funds and lenders such as National Bank of Canada.

More Anguish

"We want to avoid having the noteholders endure more anguish than is necessary,'' said Toronto lawyer Purdy Crawford, who spent almost seven months crafting the agreement and now plans to meet investors in five cities to sell it. "The alternative to this plan is the liquidation of some or all of the conduits, which as I've said would lead to substantial losses.''

Some individual investors say the Crawford plan leaves them with two unappealing options: recover most of their money when the notes mature within nine years. Or they can try to sell the debt once trading begins, assuming the plan is approved in votes scheduled for April. The debt may trade at 60 cents to 80 cents on the dollar because of the decline in credit markets, according to analysts including Colin Kilgour, who is advising clients of Vancouver-based Canaccord.

"There will undoubtedly be certain investors who are going to react strongly and potentially pursue legal channels to get those releases struck down,'' Kilgour said. "If each retail investor gets a vote, then that could really swing things.''

Legal Channels

Murray Candlish, 51, a retired hog farmer in Daysland, Alberta, says he can't wait nine years to get his C$350,000 investment back.

"We trusted these people to put our savings into something that was safe,'' said Candlish, who invested with Credential Securities Inc., through his Battle River Credit Union. "And now they want us to take 60 cents on the dollar and be happy about that?''

Jane Mitchell, a spokeswoman for Credential in Vancouver, didn't return a call seeking comment.

Investors like Candlish have more clout because Canadian bankruptcy laws require that restructuring plans be approved by a majority of creditors. The plan also needs the support of investors holding two-thirds of the value of the debt. The plan fails if it doesn't win both approvals. The two-thirds support is assured because institutional investors such as the Caisse de Depot et Placement du Quebec, which hold a combined C$21 billion, back the plan, Crawford said.

Hands Not Tied

"It actually gives me a vote,'' Candlish said. "For a while I thought my hands were tied and I virtually had no choice, except to go along with what they were proposing.''

Some investors say the risk and costs associated with a lawsuit is worth it, and they may band together in a class-action suit.

"This is the most egregious financial scandal I've ever seen,'' said Ted McFeely, president of a Calgary-based oil and gas explorer who invested C$388,000 with Canaccord. "I'm not going to sit here like a little lamb and let these guys shear me.''

About 1,400 Canaccord clients collectively hold C$269 million of the frozen commercial paper in their accounts, according to the brokerage. Canaccord Capital Chief Operating Officer Mark Maybank was out of the country and couldn't be reached for comment.

Crawford's group has been working to restructure the debt after trading of the commercial paper sold by non-bank dealers such as Coventree Inc. halted in August as investors were concerned about possible ties to U.S. subprime mortgages.

For Garry Webber, a 60-year-old pastor at the Garden Foursquare Church in Calgary with C$160,000 at stake, the crisis may force him to delay retirement, and shows how tenuous investments can be.

"We just have to be sure that we aren't putting our trust in our assets,'' the pastor said. "We've got someone bigger than that whom we have to put our trust in.''

To contact the reporters on this story:

Doug Alexander in Toronto at;

Sean B. Pasternak in Toronto at +1-

Last Updated: March 20, 2008 02:24 EDT

Click for more on ABCP