Monday, October 20, 2008
TORONTO (Reuters) - The overhaul of Canada's nonbank asset-backed
commercial paper market has been delayed by a month and should be
complete by the end of November, the committee of large investors
driving the restructuring plan said on Monday.
Volatility in global markets, the large number of participants involved,
and the documentation required are all causing the market restructuring
to take longer than expected, the committee said in a press release.
"We continue to work with the plan participants and major stakeholders
to finalize the documentation and move forward with the closing
process...," said Purdy Crawford, a lawyer acting as chairman of the
In September, the Supreme Court of Canada declined to hear a legal
challenge to the proposed market restructuring, and the investors'
committee said then that they aimed at completing the complex fix-it
plan by the end of October.
The restructuring covers short-term debt securities that were worth C$32
billion before concerns over U.S. credit quality caused a market spasm
in August 2007.
The plan is designed to enable investors to eventually recover their
money through special reimbursement programs, or by holding or selling
the new restructured notes they will receive.
The plan has been bedeviled by numerous delays and extensions, but many
retail investors have already been compensated.
According to an industry group, 610 retail investors have received
C$319.8 million in relief from seven dealers that sold the investments.
Another 1,776 customers are due to receive C$177.4 million when the
restructuring is complete, according to a report published on Friday by
the Investment Industry Regulatory Organization of Canada.
In the nonbank ABCP market, mostly small structured-finance companies
such as Coventree Inc set up trusts that issued commercial paper to
large institutions and corporations looking to park cash for short
periods. The paper was "backed" by longer-term assets such as
receivables and mortgages, as well as more complex credit derivatives.
National Bank of Canada's National Bank Financial unit also created
three of the 22 third-party trusts that issued ABCP. The bank bought
back the investments from retail clients in the summer of 2007.
Various Canadian banks and brokerages acted as ABCP distribution agents,
and independent dealer Canaccord Capital Inc sold the paper to hundreds
of its retail clients.
But none of the investment firms that sold nonbank ABCP did due
diligence on the product, and those due diligence processes are
"generally inadequate" anyway, IIROC said in its report.
Some firms said they did not distinguish between bank-sponsored ABCP and
nonbank ABCP, and most said they relied heavily on a DBRS credit rating
of R-1 (high), although some advisers incorrectly told clients the
rating was "AAA", according to the report.
Toronto-based DBRS was the only agency to assign ratings to nonbank ABCP,
also known as third-party ABCP.
"The market made no distinction between bank-sponsored programs based on
traditional assets and third-party ABCP programs using structured
financial products," IIROC concluded.
About 1 percent of the paper found its way into the retail distribution
chain in "isolated pockets," IIROC said. The product's credit rating and
slightly higher yield were the big focus, rather than its structure,
underlying assets or risk, IIROC said.
The organization has proposed new guidelines on due diligence, product
transparency, conflicts of interest and credit ratings.
(Reporting by Lynne Olver; editing by Rob Wilson)
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