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Fox Guarding the Hen House




Small noteholder stokes revolt against ABCP deal

John Greenwood
Thursday, March 20, 2008

The man behind a Facebook group for individual holders of roughly $400-million of frozen asset-backed commercial paper has begun soliciting support for a plan that would see their investments returned in full or a proposed restructuring of the notes scuppered altogether.

Brian Hunter, a Calgary-based engineer with more than $600,000 tied up in illiquid ABCP, wants all small noteholders to band together to demand their money back from the banks that created the securities in exchange for supporting a controversial rescue of the $32-billion market.

As part of a bankruptcy protection process, all noteholders will get the chance to vote on the restructuring at the end of April. Despite the fact that the bulk of the value of the paper is controlled by a handful of big institutions the success of the restructuring will depend on retail investors such as Mr. Hunter.

"It would seem like cheap insurance for any group that wants the restructuring to proceed to get the [retail investors] onside," Mr. Hunter wrote on his web site, shortly after an Ontario court granted bankruptcy protection to 20 ABCP trusts that are part of a beleaguered rescue effort known as the Montreal proposal.

"If I worked at the Caisse [de dépôt et placement du Québec] and wanted to ensure I kept my job, got my bonus next year and ended happily pensioned off, I wouldn't be taking any risk."

Mr. Hunter said investors should vote for the deal only if the institutions agree to buy back their stalled notes with interest. The current restructuring proposal calls for noteholders to receive new term paper maturing in 7 or 8 years that are expected to trade at significant discounts to their original value.

In most bankruptcies the biggest creditors typically have the most clout, but in this case small investors have the advantage. That's because in order for the restructuring to get the court's blessing, it must win support from more than 50% of noteholders by number. That means votes cast by even the smallest investor carry the same weight as the big guys.

"Retail investors now have the determining vote and we think that's as it should be," said David Weiner, a spokesman for the investors committee overseeing the restructuring. "But if they choose to reject the plan, the outcome is the unravelling" of the market.

Mr. Hunter's Facebook group has already proved a thorn in the side of backers of the Montreal proposal by using such tactics as bombarding regulators with requests to step in and by calling on the federal government to take action.

Indeed, analysts say a threat by members of Mr. Hunter's group to launch a class action lawsuit may have triggered the move to seek bankruptcy protection.

The market for ABCP not sponsored by banks seized up in early August after issuers were unable to roll maturing notes. The crisis was worldwide but only in Canada did the banks that had promised to provide emergency liquidity decline to step up, leaving investors on the hook for losses.

Noteholders range from financial institutions and corporations such as Magna International Inc. to junior mining companies. Also included are about 1,600 individuals -- many of them clients of Canaccord Capital Inc. -- such as Mr. Hunter and the members of his group, who are furious that they have been left facing what could be huge losses.

Particularly galling to investors are the blanket legal releases that the banks and other backers of the restructuring have required as a condition of their participation. Many investors had hoped to have the option of taking investment dealers and others to court to recoup their losses, but now that possibility would be taken off the table.

"I think you're already starting to see people concerned about the releases," said Colin Kilgour, an industry consultant who has been retained by Canaccord to advise its clients. Mr. Kilgour said it may be that the only way for the restructuring to go ahead will be if big players with the most at stake such as the Caisse and the banks agree to buy back the frozen notes from all small investors.

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