Tuesday, May 13, 2008
On the first day of hearings into
the fairness of a proposed
restructuring of $32-billion of
asset-backed commercial paper, an
Ontario Superior Court judge warned
he is uncomfortable with the blanket
legal immunity that would be
provided to market participants
under the workout.
Justice Colin Campbell said he is
worried that they may be used to
protect against serious wrongdoing,
such as fraud.
"I have a problem with that," he
said, adding he is not aware of any
similar situations in which players
were given such broad protection.
"Can you show me a case where there
have been allegations of fraud where
there has been release?" he said.
The fairness hearing is the final
step before the workout can go
The plan has been given the green
light by about 96% of noteholders,
but the judge said that by
sanctioning it he would be imposing
a deal on the remaining investors
that would require them to give up
their legal rights.
The ABCP market froze up in August
after issuers were unable to roll
over maturing notes and banks that
had agreed to provide emergency
liquidity declined to step in.
Even with a successful workout,
investors are expected to face
significant losses. But at least
they will get some of their money
back, which is more than they would
end up with if the deal falls apart,
according to the judge.
Despite the high level of support
for the restructuring, there is a
lot of anger on the part of
investors, some of it directed at
the institutions that created the
assets underlying the frozen ABCP.
Peter Howard, a lawyer for the asset
providers, told the court that his
clients would back out of the
restructuring unless the legal
releases extended to fraud.
"If we don't get that, then we don't
get the benefit of the plan," Mr.
The 4% of noteholders opposed to the
plan are mostly companies. Many are
worried the right to sue, which they
are being asked to give up, may be
worth more than the new notes they
will receive if the restructuring
Jeff Carhart, a lawyer representing
corporate investors with nearly
$2-billion of stalled notes, has
argued forcefully that the releases
are too broad and should not include
fraud. According to Mr. Carhart,
much of the world is watching the
restructuring and it would prove a
major embarrassment to Canada if it
the plan goes ahead and it is
subsequently learned that there was
serious wrongdoing in the market.
The hearings continue today.