Investors Scrutinizing the Regulators

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Fox Guarding the Hen House




ABCP advisors, $200-million; ABCP investors, zero

John Greenwood
Monday, January 05, 2009

Canada's market for asset-backed commercial paper remains just as illiquid as it was the day it seized up nearly 17 months ago but the lawyers and financial advisors trying to rescue it have already billed noteholders for nearly $200-million.

According to documents filed in connection with the proposed $32-billion restructuring, lawyers for the investors committee, their financial advisors JP Morgan and others had been paid or submitted invoices for $199.1-million as of Dec. 8, 2008.

The lion's share of that money -- $87-million -- is going to JPMorgan, the New York financial advisor contracted by the investor committee to figure out how to convert the $32-billion of frozen paper into long term notes.

Meanwhile, thousands of holders of frozen ABCP, including some in financial distress, are still unable to access their investments.

Lawyers for the investor committee are expected to file a motion asking an Ontario Superior Court judge to approve an amended restructuring plan as early as Tuesday, paving the way for a court hearing by the end of the week, which is widely expected to result in a positive ruling.

The revised plan is bolstered by $4.45-billion in additional margin facility to support the leveraged credit default swaps that make up the bulk of the assets underlying the frozen ABCP. The new cash is being provided mostly by the federal government, Ontario and Alberta, which has led some observers to call it a government bailout.

Observers say that if the court gives the green light to the workout as expected, it could be completed before Jan. 16, clearing the way for about 1,800 retail investors to get all their money back as part of a deal announced by Canaccord Capital and Credential Securities.

In a note to clients on Dec. 24, Canaccord chief operating officer Mark Maybank called the revised restructuring "an exceptionally important milestone in what has been a long and challenging process, but one that we have great confidence will be completed successfully."

Mr. Maybank said that under the current timetable retail noteholders would have their money returned the week of Jan. 26.

While individuals will get their money back, the rest of the noteholders are unlikely to be so lucky. Under the restructuring, the companies and institutions that hold the vast majority of the frozen ABCP will get new notes that they will most likely have to hold until they mature in 2016 since the market for investment products such as this is not expected to unfreeze.

The market for non-bank sponsored ABCP fell apart in August 2007 after investors stopped buying and the banks that had agreed to provide emergency liquidity declined to step up. That prompted a group of major investors led by the Caisse de depot et placement du Quebec to halt the market while they put together a rescue plan.

Critics complain that the restructuring is flawed because it relies on the same group of liquidity providing banks that refused to step up in August of 2007, triggering the market collapse.

The $4.45-billion of additional margin facility was demanded by players such as Deutsche Bank, Merrill Lynch and Citigroup as a condition for entering into the revised plan.

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