ABCP resolution within sight

A new agreement on the restructuring of the $32-billion third-party asset-backed commercial paper (ABCP) market has brought investors within reach of their money and one step closer to turning the page on one of Canada’s longest-running financial sagas.

A new agreement to swap the illiquid commercial paper for new bonds replaced the one struck in March, which was threatened by the current market volatility and lack of credit. On the heels of the deal, the governments of Canada, Quebec, Ontario and Alberta agreed to provide backstops totalling $3.5 billion.

“As a result of these latest developments, we can begin the process of completing this restructuring,” said Purdy Crawford, chair of the ABCP restructuring committee, in a statement.

Under the new deal, large ABCP investors will be given bonds as early as Jan. 2009, which they can sell or hold to maturity in nine years, while retail investors — those with under $1 million of the paper — will receive cash.

The closing of the restructuring is planned for Jan. 16, 2009.

Large holders of ABCP such as the Caisse de dépôt et placement du Québec are pleased, as the deal will help them avoid billions in losses. Likewise, small investors will recoup their cash — even entire life savings, in some cases.

So-called “middle investors,” however, are not as happy with the outcome, as they will be left holding bonds that will take as long as nine years to mature. Most of these investors are small- to mid-size companies that have suffered a loss of operating capital in the meantime. A key clause to the deal was the agreement to forego any lawsuits for lost investments, which was challenged by a group of investors but dismissed by the Supreme Court.

The latest deal was finalized on Dec. 20, 2008, when a group of banks agreed to provide backing at the behest of Bank of Canada Governor Mark Carney. Without support from the banks and respective governments, many observers did not expect the deal to survive.

According to Finance Minister Jim Flaherty, the backstop is a confidence-building gesture and is unlikely to be used.

The Caisse de dépôt et placement du Québec had praise for the plan.

“The closing of the restructuring plan is very much in sight,” said Fernand Perreault, the Caisse’s acting president and chief executive officer in a statement. “This outcome reflects the spirit of co-operation that prevailed between all the parties in order to arrive at a result that takes into account the severe deterioration of the markets in the fall of 2008.”

Perreault singled out committee chairman Purdy Crawford, “whose leadership enabled all the parties to reach an equitable solution.”

The restructuring, according the Caisse, makes it possible to avoid a disorderly liquidation of the ABCP, which would have involved substantial losses for all holders, and involves the issuance of new notes with maturities corresponding to those of the underlying assets.

(12/31/08)