Credential Securities has announced a program to buy back restructured third-party asset-backed commercial paper (ABCP) from small retail clients, at par. The program follows a virtually identical plan announced last week by Canaccord Capital. 
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The relief program achieves par value plus an entitlement to any unpaid interest for clients with $1 million or less in ABCP investments. Clients will remain entitled to any unpaid interest as outlined under the restructuring plan. In addition, Credential Securities will reimburse the eligible clients’ pro rata share of the restructuring costs.
Credential has not said how many of their clients are “eligible clients”, but those who are and wish to participate in the relief program will execute will effectively “sell” or “transfer ownership” of their notes in return for their par value.
All of the capital needed to fund the purchase will be committed to escrow. Clients will receive their proceeds no later than 20 business days after the exchange of their ABCP investments for restructured notes, in accordance with the restructuring plan. The restructuring plan implementation date is currently scheduled for May 23, 2008.
“Throughout the ABCP liquidity crisis, Credential Securities and our partner credit unions have been working hard to support our clients. We are proud of this joint effort and of securing a solution in the best interests of the vast majority of our ABCP investors.” says Bob Hague, interim CEO of Credential Financial. “Our focus now shifts to ensuring our clients understand the specifics of the proposal and how it benefits them.”
One of the lingering questions for Credential is where the firm is getting the money to fund the top-up. Canaccord ended up covering about 39 cents on every dollar that is being repaid to its investors, which will cost that firm about $39.6 million after taxes. Canaccord had this cash in reserves.
Diane Urquhart, an independent financial analyst and investor advocate, says a similar scheme would cost Credential about $18.7 million to buy back the notes from its investors.
“If it is true that credential is paying $18.7 million you can see from the financial statement they only have $12 million in shareholder equity. There has been an infusion of capital into Credential,” she says.
Urquhart is also concerned about conditions on the Canaccord relief program being extended to the Credential program, which could see it being scrapped if other noteholders decide to take legal action against it.
“In addition to the fact that the restructuring vote needs to receive a yes vote, the sanction hearing must receive approval, and the transaction close without any amendment; Canaccord has added additional conditions that there be no litigation against the relief plan,” she says.
Urquhart says theoretically the investors who are not eligible for the relief package could mount a legal challenge to the plan after the restructuring vote. This would mean the restructuring vote would pass, but the retail investors who voted for it would not receive the deal — the primary reason for their decision to vote yes in the first place.
“There are people who can litigate outside those who are getting relief, so that condition is unacceptable,” she says. “It’s possible you could have a yes vote and still not get your cash.”
Urquhart says the lawyers representing the retail investors can’t be sure of this yet though because they have not received the proper legal documentation for the Canaccord deal.
“We know the basics, but lawyers don’t make opinions based on memos and press releases,” she says. “I guess I’m going to be optimistic that those legal documents will arrive shortly and that the conditions can be negotiated in a satisfactory manner that the advice of the legal group and myself will be to vote yes and proceed with this offer from Canaccord and Credential.”
Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com
(04/18/08)
