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Flaherty urged to ensure ABCP investment dealers, banks pay retail investors

December 12, 2008

By David Paddon

TORONTO - Lawyers for more than 2,000 retail investors with delinquent asset-backed commercial paper investments are calling on Finance Minister Jim Flaherty to ensure their clients are repaid immediately.

A spokesman for the finance minister said Flaherty is monitoring the ABCP situation but no meeting between him and lawyers for the participants is scheduled at this time.

The lawyers and their clients argue that retail investors, without the expertise of financial professionals, shouldn't have been sold nearly $400 million of the debt instruments in the first place.

They want the investment dealers and banks who distributed the notes to repay their retail clients all their money, plus interest, without further delay.

Efforts to salvage about $32 billion in Canadian asset-backed commercial paper, or ABCP, have been stalled for months.

Most of the ABCP is held by pension plans and corporations but the retail investors' support has been crucial part of a court-approved restructuring that has been stalled by the global credit crisis.

The lawyers representing retail investors with ABCP paper were responding to news that Ottawa is being asked to provide about $9.5 billion of guarantees to ensure the process doesn't break down.

Flaherty's office has confirmed that officials from his department met this week with representatives of the a committee headed by Purdy Crawford that represents institutional investors.

But Flaherty hasn't made a major public statement recently on the ABCP issue and an email from his spokesman, Chisholm Pothier, suggests the minister is keeping his options open.

"The minister has consistently said a market-led restructuring is a preferred course of action for investors and capital markets in Canada, one that does not depend on taxpayer dollars."

"Any actions taken by the Government would reflect its ongoing commitment to protecting financial stability and ensuring the health of Canada's capital markets."

An estimated 99 per cent of the notes by value are held by institutional investors, such as pensions and businesses. The biggest single holder when the ABCP market froze up in August 2007 was the Caisse de depot et placement du Quebec, with $13 billion.

Other major players represented by Crawford's committee are National Bank (TSX:NA), the Desjardins Group, ATB Financial and several credit unions and the Canada Mortgage and Housing Corp.

MP Scott Brison, the Liberals' finance critic, said Friday that a failure of the ABCP rescue plan "would have a terrible effect on many Canadian's savings and financial institutions."

"The private sector participants in this deal made significant compromises and it would be a mistake for the government not to try its best to keep this deal on the rails."

Henry Juroviesky, representing mostly retail clients of Canaccord Capital (TSX:CCI) and Credential Securities, wrote that their lawyers should have equal access discussions with finance officials as does Crawford's Pan Canadian Investors committee.

He also called on Flaherty, either directly through the federal government or indirectly in co-operation with provincial governments, to make sure the retail investors don't have to wait for the completion of the overall restructuring effort before they get their money.

Juroviesky also took aim at one of the biggest sore points in the original agreement worked out in Ontario Superior Court under the federal Companies Creditors Arrangement Act - that ABCP holders give up their right to sue the businesses that sold them the paper.

"Any new plan of compromise implemented under Federal Government assistance cannot include any immunity to and/or release or surrender of legal claims and causes of action originating from the sale of ABCP to retail owners, except in the context of a full cash settlement for this group," Juroviesky wrote in his letter to Flaherty.

Under the original compromise proposal, spearheaded by Crawford, holders of ABCP would exchange their short-term notes - which have matured and would have been repaid or renewed by now under normal circumstances - for longer-term notes that mature years from now.

That plan met some of the needs of pension managers with billions of dollars in assets and long-term investment horizons.

But it didn't satisfy individuals who had put much of their retirement savings into ABCP. They had significant voting power under the court-supervised plan of compromise and many supported the deal reluctantly, only after being assured they'd quickly be repaid under side deals offered by their investment dealers.

Asset-backed commercial paper was supposed to be a low-risk, short-term investment that would mature within a year but the market for new third-party ABCP dried up in August 2007 and redemptions ceased soon afterwards.

Juroviesky told Flaherty that many of retail clients "would be loathe" to support any new plan that requires a completion of the whole restructuring "as there is a growing sense of frustration and emotional duress amongst our client base given the repeated delays and the potential inability to successfully implement the first compromise plan."

Crawford's committee announced Thursday it will seek another extention to a court protection, which expires Dec. 19, because of the extra time needed to get approvals for a new compromise deal.

The committee said the changes will require formal approval by key participants of the restructuring, which is now expected to close in January.

Crawford said in a statement that the changes to the deal include an initial moratorium during which no collateral calls may be made and an additional $9.5-billion in margin facilities.

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