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ABCP restructuring plan delayed by a month



Lynne Olver

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 committee.

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.

($1=$1.19 Canadian)

(Reporting by Lynne Olver; editing by Rob Wilson)


Reuters 2008




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