Wednesday, March 19, 2008

BoC Brought Banks on Board in ABCP Crisis

Financial Post, Duncan Mavin, 19 March 2008

Purdy Crawford and his team of lawyers have praised Bay Street for coming together to try to salvage Canada's non-bank asset-backed commercial paper market, citing a "spirit of compromise and goodwill."

But it was actually the backing of the Bank of Canada and the threat of financial meltdown that strong-armed domestic and foreign banks into supporting the restructuring plans.

Faced with the daunting task of delivering Canada's largest ever restructuring, Mr. Crawford had "no authority and no real instruments of power," said a well-placed source. As late as last week, two of the big Canadian banks were wavering over the level of support they had promised last year for Mr. Crawford's restructuring plans.

But the plan is back on track thanks to the influence of the central bank, which has been a key driver behind the restructuring efforts, calling Canada's big banks to order over a crisis still far from settled.

The role of the Bank of Canada - under former governor David Dodge and his successor Mark Carney - was confirmed when Toronto-Dominion Bank became the last of the big domestic banks to lend its support to the proposals put forward by Mr. Crawford and his committee, late on Monday.

TD had originally declined to support the restructuring plan because it did not have exposure to the non-bank ABCP market. The bank's commitment to support the plan will not be material to TD. Chief executive Ed Clark said in a statement his bank had been asked to "play a role" and agreed "on the basis that both the government and the [Crawford] committee indicated our participation is critical to the overall success of the restructuring process."

TD's decision to lend a hand comes after Mr. Dodge, Mr. Carney and others at the central bank spent months seeking the unanimous support of the banks -- their backing could help avoid the sort of crisis of confidence that has exacerbated global financial sector turmoil, and precipitated the collapse of Bear Stearns this week.

In December, Mr. Dodge told the Financial Post editorial board that all Canadians could pay a price if banks fail to come up with an agreement and $300-billion worth of leverage is allowed to unwind in a worst-case scenario.

Mr. Crawford's committee was tangled up in detail, banking regulators were apparently unwilling to apply any pressure, and the $32-billion ABCP crisis was going nowhere for several months last year, industry sources said.

Before the end of the year, the Bank of Canada set up meetings with banks and brokerages, where Mr. Dodge urged the banks to get on board to supply liquidity to the plan being hammered out for the frozen market.

"If the whole market goes into a shambles everybody gets affected, including Mr. and Mrs. Jones on Main Street," Mr. Dodge said at the time. "We have a collective interest in the whole thing not going into a shambles."

Many Canadians would be affected by a failure to restructure the ABCP and all the banks would feel some pain, the former central bank governor warned.

"Everybody, including the international banks, have a real interest in trying to somehow get this thing resolved."

Since then, the Bank of Canada has played a big part in trying to bring about an orderly resolution to the crisis.

When Mr. Dodge retired at the end of January, his successor Mark Carney - a seasoned investment-banker - took an equally active interest in the frozen ABCP market, said a source close to the restructuring efforts.

"The Bank of Canada and Mark Carney have been front and centre on this," the source said. "They did everything they could from a moral suasion perspective."

By the end of last week, the restructuring efforts were given extra impetus when Canadian bankers witnessed the U.S. Federal Reserve step in to avoid meltdown in the U.S. banking sector.

By Monday, the ABCP agreement was heading for the biggest insolvency filing in Canadian history, and there was at last some headway on the crisis that has bedevilled Canada's top corporate lawyers and bankers since last August.

The restructuring plans were given another confidence boost yesterday when National Bank of Canada said it has committed to provide $815-million in liquidity to support the efforts of the proposed restructuring plan. The other Canadian banks are providing a total of $950-million in support.

An orderly settlement is still some way off, and a number of small investors are disenchanted with a process they say is leaving them unfairly out-of-pocket. But and the central bank's efforts appeared to be paying off, at least in terms of bringing all the Canadian banks to the table.

"It has been difficult, it has been complicated, it's taken longer than people might like but by putting in place the standstill," Mr. Carney said. "I think the major participants (investors, asset providers, liquidity providers, agents of the paper) avoided the fire sale and very low returns for investors on this paper."
Financial Post, John Greenwood, 18 March 2008

Retail investors now hold the key to the unfreezing of $32-billion of seized-up asset backed commercial paper following on details released earlier this week concerning what amounts to the largest bankruptcy protection filing in Canadian history.

Among other things, it was disclosed that the key to the success of the restructuring lies with retail investors rather than big institutions because the plan must win support from more than 50% of note holders. Although players such as the Caisse de depot et placement du Quebec hold the lion's share of the affected paper by value, retail investors are far more numerous.

Ever since the rescue known as the Montreal proposal took shape last August, small investors have complained that their interests were being pushed aside in favour of the institutional players. Now, according to Purdy Crawford, the head of an investors committee overseeing the restructuring, their voices will be heard.

However, it was also disclosed that in connection with the restructuring, the banks, investment dealers and rating agencies such as DBRS that created the ABCP will be granted immunity from prosecution as a reward for supporting the restructuring.

"Key participants who are making a substantial and necessary contribution require the releases," Mr. Crawford said in an affidavit. "Simply put, there can be no [restructuring] unless these releases are included, and I believe the benefits of the plan, taken as a whole, justify the releases."

Most of the frozen ABCP is held by organizations such as the Caisse de depot, National Bank Financial and various government bodies. However, investors also include more than 1,600 individuals, many of whom were sold the notes by investment dealers and banks even though they may not have been part of the sophisticated investor category permitted under regulatory requirements to own the securities.

"I went ballistic when I saw the part about the legal release," said a small investor based in Toronto. "I couldn't believe they would let these guys off the hook."

"It's an extreme abuse of investors who were sold a savings product that was flawed," said Diane Urquhart, an independent analyst.

The noteholder vote is slated for the end of April, and observers say that given the ongoing turmoil in the credit markets and the level of investor sentiment, the result may be too close to call, at least for now.

As part of the restructuring, investors will receive longer term notes. Originally, the new notes were to have ratings from at least two rating agencies, but according to Mr. Crawford, they will have just one rating, from DBRS. Given that the bulk of the underlying assets will be highly complex credit default swaps that have fallen out of favour with investors, many observers expect they will trade well below face value.

The decision of whether to support the restructuring is "a bit of a high-stakes poker game," said Colin Kilgour, an industry consultant. "Either investors [support the plan and] take the new notes or they keep the bankrupt ABCP and pursue their legal options."
Bloomberg, Doug Alexander and Sean B. Pasternak, 17 March 2008

An investors' group ``substantially completed'' a restructuring of C$32 billion ($32.1 billion) in Canadian commercial paper that hasn't traded since August, and urged debt holders to support the plan to avoid ``significant losses.''

Twenty trusts received bankruptcy protection today in an Ontario court until April 16, giving investors time to review a plan drafted by a committee of some of the biggest debt holders. The proposal needs the support of a majority of noteholders, as well as investors holding a combined two-thirds of the debt.

``I am recommending that all noteholders approve the plan in order to avoid a forced liquidation of conduits and the significant losses that would likely ensue if the plan were not to move forward,'' committee Chairman Purdy Crawford said in a statement.

The group led by Crawford, a Toronto lawyer, has been working since September on a proposal to swap the short-term debt for longer-term notes, and aimed to submit the plan to investors by March 14. The creditor protection was needed ``in order to maintain a level playing field while allowing the debtor the breathing space it needs to develop the required consensus,'' the group said.

Crawford told reporters in Toronto he expects investors who hold their notes to maturity, in five to eight years, will recover most of their investment.

`Good Paper'

``It's good paper on the whole,'' he said outside the courtroom. ``But if they trade it, who knows?''

Investors who sell the notes after the restructuring is done may get about 70 cents to 80 cents on the dollar, said Colin Kilgour, a consultant advising commercial paper holders including clients of brokerage Canaccord Capital Inc.

Crawford said today that market turmoil will play a role in how much investors will receive. In a December conference call, he predicted that ``almost all'' of the value would be returned by the time notes would mature.

``It may be very difficult to predict in these markets,'' Crawford said today on a media conference call. ``If things stabilize, the chance of recovery will be much greater, but I wouldn't want to say that everybody's going to get their money back at maturity.''

Crawford also said today that the group will meet investors in major Canadian cities such as Toronto, Montreal, Edmonton and Vancouver.


DBRS Ltd., the Toronto-based rating company, downgraded the ratings of the 20 trusts to ``D'', its lowest non-investment grade rating.

The group has been working to restructure the debt after trading of the commercial paper halted in August as investors were concerned about possible ties to U.S. subprime mortgages.

A group of foreign banks, Canadian lenders and pension funds led by Caisse de Depot et Placement du Quebec negotiated the so-called Montreal Accord on Aug. 16, where banks wouldn't demand collateral from the affected trusts and those funds wouldn't ask banks for emergency funding.

Crawford's group had asked the Ontario Superior Court of Justice to call a noteholder meeting to approve the plan. Investors holding about C$21 billion of the notes have already agreed to the plan with some conditions, according to the filing.

Canadian Finance Minister Jim Flaherty encouraged ``all investors to consider it seriously and to participate in the voting process,'' according to a statement.

World Is Watching

Crawford said the world is watching whether Canada can be the first country to successfully restructure the asset-backed securities without a government bailout.

The biggest holders of the commercial paper include National Bank, the country's sixth-biggest bank, the Caisse pension fund, ATB Financial, an Alberta lender, and travel company Transat A.T. Inc.

``Our preferred solution is to get our cash back'' as soon as possible, Transat Chief Financial Officer Francois Laurin said in a telephone interview. ``You always hope they bring a better solution to the investors and holders like us, who don't want to be there for the long term because we invested on a short-term basis.''

Bank Credit

The restructuring includes a credit line of almost C$14- billion provided by institutional investors, foreign banks and Canadian lenders. Bank of Montreal, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Bank of Nova Scotia and Toronto- Dominion Bank indicated in a March 13 letter they would provide a combined C$950 million to support the new notes as part of that credit line, court documents show.

``In light of continued challenges facing financial markets, TD was asked to play a role and we've agreed on the basis,'' said Toronto-Dominion Chief Executive Officer Edmund Clark, in a statement.

The group asked the court to appoint Ernst & Young Inc. as the monitor in the restructuring.

The group said legal and banking fees paid to advisers including JPM Morgan Chase & Co. and Goodmans LLP have been about C$80 million to C$100 million.
The Globe and Mail, Tara Perkins, 17 March 2008

The committee working to restructure $32-billion of commercial paper has put the investments into bankruptcy protection, and will now work to sell investors on its plan.

The plan, if approved, would shield the market's key players from lawsuits. That is expected to be a big source of tension.

The restructuring will have an impact around the world, Toronto lawyer Purdy Crawford, who is heading the committee, said outside the courtroom after Mr. Justice Colin Campbell of the Ontario Superior Court approved the bid to put the sector under the protection of the Companies' Creditors Arrangement Act.

“Everybody's interested in whether we can be the first country to complete a successful restructuring without governments bailing anybody out,” he said yesterday. “And hopefully it will help cool out the markets worldwide; certainly that's the view of the head of the Bank of Canada.”

Central bank governor Mark Carney reiterated yesterday that he believes the committee's work avoided a fire sale in the sector by essentially freezing the paper through a standstill agreement.

Finance Minister Jim Flaherty said “the court has now approved a process for investors to vote on the restructuring proposal based on detailed information provided by the investors committee and its advisers. I encourage all investors to consider it seriously and to participate in the voting process.”

Mr. Crawford sought to head off what he knows will be one sore spot for some investors.

These are blanket legal releases, which will be given to nearly all participants in Canada's third-party asset-backed commercial paper sector if the committee's current plan is approved. The releases would be extended to banks, credit rating agency DBRS Ltd. and brokers, in addition to the companies that created the paper, making it more difficult for investors in the sector to successfully sue them.

“Some investors believe they have rights to sue parties on account of their losses,” and that the releases would take those rights away, Mr. Crawford said in an affidavit filed in court yesterday. “Some have told me they support the financial aspects of the plan, but do not wish to release the parties they believe should be held responsible to them for their losses.

“I understand these views. However, negotiation of the plan has been the art of the possible,” he said, explaining that some key players in the restructuring said they wouldn't participate without the releases.

It was a group of investors that hold more than $21-billion of the paper – including Crown corporations, financial institutions and companies – that pushed the 20 trusts that created the paper into court proceedings, under which the committee will finalize its plan to fix this market.

A key standstill agreement that had been keeping the market frozen, and preventing the paper's value from crashing, expired at midnight on Friday. The court protection now extends until April 16, at which point it could be extended, while the committee has negotiated a standstill agreement with the asset providers until the end of April.

Some key details of the plan are still being negotiated.

To date, the committee has secured 98.5 per cent of the $14-billion in backup funding commitments it needs for the smooth operation of the restructured market.

“The reality is we've gone through hell with the markets since we signed off in December,” Mr. Crawford said. At that point, they were asking the Canadian banks and other parties who were contributing to the standby line of credit to do so for 160 basis points, when the going market rate would have been 250 to 300 basis points. “Today, it would cost 500 to 600,” Mr. Crawford said, but the credit line is being obtained at the original price. (A basis point is 1/100th of a percentage point.)

The committee expects some of the new longer-term notes that will be created by the restructuring will receive investment-grade ratings by DBRS. It “attempted to obtain ratings from a second rating agency, but could not do so,” Mr. Crawford said in his affidavit.

A key aspect of the restructuring involves taking the short-term paper and transforming it into longer notes, with maturity dates of up to nine years.

Those who hold the notes to term should recoup much of their value, Mr. Crawford said yesterday. “What they get if they trade in the market over the next year or two, who knows, depending on the world markets,” he said.

Mr. Crawford will soon be travelling across the country to hold meetings with investors, who will be able to vote on the plan at a meeting that's expected to be held in late April.

In its request for bankruptcy protection, the committee said “in the absence of a successful restructuring, there will be serious losses, measured in billions of dollars, to investors and other market participants.”

Mr. Crawford said the Canadian banks – asked to commit $2-billion – are all on board, although “some negotiating” remains.