ABCP decision a mixed blessing for investors

Monday night’s decision by the Ontario Court of Appeals allowing the asset-backed commercial paper restructuring plan to proceed was a mixed blessing for investors.

The deal, hammered out by the Pan-Canadian Investors Committee, allows retail investors who bought less than $1 million of ACBP to get all their money back, while institutions and individuals who have more than $1 million tied up in the paper will have to hold their investments for nine years before they can get their cash returned.

“It was a good decision from the point of view of close to 1,800 families but a negative result for retail customers that have not yet received cash settlement offers,” says Diane Urquhart, an investor advocate and former Scotia Capital research head.

She says a number of investors who invested more than $1 million on ABCP are elderly Canadians who invested their retirement savings in the asset and shouldn’t be lumped into the same category as the corporations who purchased the paper. “The vast majority of individuals had other purposes for their cash,” she says, explaining that these people need their money now, not down the line. “A million [dollars] might sound like a lot, but this was money that was a significant part of their life savings.”

Paul Gardner, a partner at Toronto-based Avenue Investment Management, says the decision was not a surprise, and neither was the fact that the agreement was challenged. “Investors wanted a better deal. You fight until the last breath is drawn,” he says. “Every person would do that, as it’s not technically a fair deal for all investors.”

He says small-time retail investors did come out on top, while bigger players are left behind. “They’re giving sympathy to retail investors and telling institutions that they should have known better,” he says. “Retail investors weren’t as sophisticated as institutions.”

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If investors challenge the deal in the Supreme Court, it’s unlikely they’ll win, says Gardner. He says the courts can’t go against the decision since it would cause a lot of harm to a number of parties. “You have to look beyond the strict legal definition of protection in regards to cross-suing and the unfairness of it,” he says, referring to the provision in the agreement that says investors may not sue the companies involved in the ABCP fallout. “The judge’s role is to be fair and impartial, and in a way he knows the harm caused to retail and institutional investors [by rejecting the deal] would be far worse.”

If investors do not take the case to the Supreme Court, it’s expected that monies will be paid out by September 30 and that the restructuring of ABCP into long-term assets, which will pay out 10% in five years and the rest in nine, will move ahead.

However, everyone involved will lose some money. Smaller retail investors will get their principal back, but without interest over the past year, while institutional investors who don’t want to keep their money locked up for years will likely be able to sell their new long-term notes on the secondary market at around 50 cents on the dollar.

This may be good news for people who want to see this saga end, but Urquhart thinks the court’s decision has just made life more complicated for investors in the long run. Her main issue with the decision is that the parties involved are immune from lawsuits.

“Civil liability is one way in which the private sector can impose a process for all involved to examine the facts and determine if unlawful conduct occurred,” she says. “It’s a dangerous door [to open] in allowing the industry that does not have significant government supervision to have this tool in courts — to allow them to be immune from civil liability pressure.”

But Gardner sees the decision as “part of a healing process.” He thinks the ABCP market could pick up again, as long as liquidity is guaranteed by the banks.

Third-party asset-backed commercial paper, however, won’t be resurrected, at least not in the near-term, and retail investors will likely stay away from anything with the words asset-backed in its name.

“At this point it’s probably worthwhile to go back to the bank-sponsored, asset-backed security market because there are good spreads above the Government of Canada,” he says. “But it’s dysfunctional right now, and retail investors will avoid it like the plague because they don’t understand it.”

Ultimately, buying the paper in the first place was a huge mistake. Gardner points out that although ABCP was riskier than other investment products, its extra spread was minimal. “You weren’t getting paid for the risk taken,” he says, blaming advisors who “didn’t know what the hell they were selling.”

“Investment advisors need to take a really hard look at themselves and realize that there was an implicit risk to this product,” he says.

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(08/19/08)

Bryan Borzykowski