Investors Scrutinizing the Regulators

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Fox Guarding the Hen House




Burned investors willing to work with committee

March 26, 2008| Mark Noble

One of the major hurdles in front of a large group of retail investors who have their money frozen in non-bank asset-backed commercial paper has been passed they have found a firm that can help them navigate the complex legal web weaved by the ABCP restructuring committee. They are not yet planning to sue those that sold them the now-frozen paper. Instead, investors are hoping they can cut a deal before the ABCP restructuring plan goes to a vote.

Brian Hunter and Ted McFeely, two of the leaders of the investors' group have acquired the services of law firm Juroviesky and Ricci.

Hunter, who has $658,000 of his retirement savings frozen in ABCP, hopes that retaining the firm will aid investors in getting their money back as soon as possible. The proposed restructuring plan will turn most of the ABCP into long-term notes, but Hunter says many of the retail investors need access to their money now.

"We don't have any balance sheets to hide this stuff on," he says. "The point is to get represented in the process, to see if there can be modifications made to the restructuring plan one way or another."

What the investors want ideally is to be made whole, something they believe the big banks and ABCP sponsors can afford to include in a revised restructuring deal.

Lawyer Henry Juroviesky says his main goal will be to try to negotiate a deal under which the retail purchasers of ABCP would be able to sell their notes immediately and receive full value for their holdings.

Earlier this week, Diane Urquhart, an independent financial analyst who will be advising Juroviesky and Ricci on some of the financial details of the case, said it could cost Canaccord $269 million to buy the ABCP from its clients who have their savings frozen.

"With estimated marked-to-market losses of -40% to -60% on the non-bank ABCP, Canaccord's unrealized market loss on a full cash buyout of its customers placed in non-bank ABCP would be $108 million to $161 million, pre-tax," she said. "Using the average corporate tax rate that Canaccord paid for the nine months ending December 31, 2007, of 36%, the Canaccord unrealized write-down would be in the range of $69 million to $103 million after tax."

Urquhart believes if Canaccord bought the paper back, it would help its corporate reputation, while leaving the firm with the option of taking legal action against the ABCP sponsors who sold it the paper.

"Against this worst case for Canaccord is Canaccord's right to sue for compensation from the other sponsors, financial institutions and Dominion Bond Ratings Service, who manufactured or distributed the flawed non-bank ABCP," she said. "Plus, Canaccord can retain the restructured long-term notes and over the next five- to eight-year term of these notes, if there is recovery in their marked-to-market valuation or Canaccord is able to sell them at better future prices in the secondary market, then Canaccord can book a recovery of the write-down that it made in its fiscal 2009 year ending March 31, 2009."

This type of litigious cycle is exactly why the Pan-Canadian Investors Committee for Third-Party Structured ABCP sought protection for the paper under the Companies' Creditors Arrangement Act (CCAA) by an Ontario Superior Court judge. CCAA makes legal action against all the firms involved in the restructuring process virtually impossible.

Retail investors are left with two choices: either vote against the ABCP restructuring deal, of which they hold the majority of votes since one vote is awarded per note holder, or work within the CCAA framework. For now, Hunter says they have chosen the latter.

"Right now I don't think that deal is in anybody's best interest, but I would like to see us try to walk arm in arm, like a 70-lawyer love-in, or rather make that a 71-lawyer love-in now," he says.

Voting the restructuring plan down could have significant consequences, stripping ABCP providers of immunity from margin calls and forcing them to sell their holdings on a hostile market for a fraction of their face value.

This has been the position of the Pan-Canadian committee. However, this hard line may be softening. As reported by other media sources, Purdy Crawford, committee chair, did address the topic of retail investors at a Wednesday luncheon before the Canadian Club in Toronto.

At the luncheon he admitted that the committee has to turn its attention to working with the retail investors to get the plan approved and that a "deal" may be in the works. He said he is worried, however, that retail investors may use their balance of power in the voting process to derail any deal that solves the ABCP crisis.

Filed by Mark Noble,,


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