ABCP deal cold comfort for retail investors

Just as progress was being made on an agreement to restructure asset-backed commercial paper, there is a growing awareness of a number of individual retail investors — roughly 1,600 — who have been burned by the liquidity crisis.

These investors are faced with a stark choice: either take the deal and give up their right to sue for full restitution or go after those they feel have wronged them, risking a total loss.

The ABCP crisis was supposed to be a big problem for big players, but it’s estimated that between 1,400 and 1,600 small investors are stuck with the frozen paper, unable to recoup their money and likely facing losses if the restructuring process is approved. Most of these investors unwittingly put their money in the ABCP on the direction of their brokers.

On social networking site Facebook.com, individual ABCP investors, most of whom invested in the notes through Canaccord Capital, have created a group that offers information about their experiences and what course of action to follow.

Ron Lawley, a 72-year-old retiree, is one of these investors. Lawley liquidated around $210,000 of equities to create a T-bill account on the advice of his Canaccord Capital advisor in B.C. In July, Lawley says, he found out his advisor did not put the money in a T-bill account, but rather in ABCP.

“I talked to the advisor and asked, ‘What is this stuff?’ She said it was just as good as T-bills and guaranteed and liquid,” he says.

A month later, Lawley found out his money was frozen, and he has been unable to access it since. This has created considerable hardship, Lawley says, because he suffered a stroke eight months ago and has needed access to money immediately.

Lawley says he was put in the ABCP without his permission, so he could seek redress through the IDA, but his primary hope for restitution was legal action against those who initially provided the ABCP, something he will have to give up if the ABCP restructuring plan is approved.

On Tuesday evening, Purdy Crawford, the chair of the Pan-Canadian Investors Committee for Third-Party Structured ABCP, the group responsible for hammering out a restructuring plan for more than $32 billion of frozen ABCP, addressed small-investor concerns on a conference call with the media.

Crawford said he sympathized with those stuck with ABCP, but he said the Companies’ Creditors Arrangement Act (CCAA) protection approved by Court of Ontario Justice Colin Campbell of the Ontario Superior Court of Justice on Tuesday paved the way for a restructuring plan that will provide the best solution for those investors. The court ruling gives ABCP conduits creditor protection from margin calls until the restructuring plan is voted on by note holders sometime in April.

“I understand many investors have suffered hardship and anxiety as a result of the freezing of their assets. We are very sensitive to the plight of these investors, and I’ve spoken with many of them,” Crawford said. “I understand many of them face formidable financial challenges. We want to avoid having the note holders endure more anxiety than is necessary. The alternative to this plan is the liquidation of some or all of the conduits. As I’ve said, this will lead to substantial losses.”

Crawford says this is because the market conditions are not good for ABCP and if the plan falls through, third-party providers will be beset with margin calls and will be forced to sell their holdings for a fraction of their face value. The plan gives providers a chance to convert the notes over the long term, allowing them to mature in a much more stable market environment … hopefully.

“We have never said that all of the investors will get their money back. It’s really very difficult to predict in these markets. If things stabilize in the next few months, the chances of recovery will be much greater,” he says.

Layne Arthur, another ABCP investor with more than $430,000 frozen with Canaccord Capital, says the agreement is unacceptable. Unlike Lawley, he agreed to put his money in ABCP, but he did so under the assurances that the safety of the vehicle was the equivalent of that of a short-term GIC.

“I’m not signing that [ABCP agreement]. No way,” he says. “We are not settling for anything less than what is owed to us.”

Instead, Arthur says he’s going to be looking to join a class action lawsuit to possibly sue Canaccord and its ABCP provider, Scotia Capital, for both the principal on the investment and additional income that could have been yielded on the investment during the period it’s been frozen.

A process of protracted litigation could be where the ABCP process goes because small investors like Arthur and Lawley hold considerable weight based on a change to the note-holder approval plan that will give each ABCP holder a vote regardless of size.

“There are two criteria to note holders — it must have approval of 66 2/3% of the aggregate value. That’s always been the case. The new factor as a byproduct of the CCAA approach is that the plan also requires the approval of 50% plus one — or otherwise a majority of all investors,” says David Weiner, a spokesperson for the Pan-Canadian Investors Committee.

Weiner estimates there would be 1,600 small investors versus a few hundred institutions. He suggests investors carefully weigh the consequences of voting the plan down.

“Then they take their chances. The trusts will essentially collapse, margin calls will be issued, and they can see their way through years of litigation,” he says.

Weiner’s warning about letting market conditions determine the value of the ABCP would seem to have added weight considering that Dominion Bond Rating Services (DBRS) has downgraded 20 of the frozen ABCP trusts to a rating of D in light of the fact the trusts have essentially filed for bankruptcy protection under the CCAA. A D-rating is its lowest non-investment-grade rating.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(03/18/08)

Mark Noble