Fate of ABCP remains unknown

Holders of asset-backed commercial paper are still in the dark about the fate of their much-maligned paper. A committee set up after the signing of August’s Montreal Accord failed to meet its December 14 deadline to come up with a restructuring proposal for ABCP.

The Pan-Canadian Investors Committee for Third-Party Structured Asset Backed Commercial Paper announced early Saturday that substantial progress had been achieved in establishing a framework to restructure the ABCP issued by the 21 remaining trusts covered by the Montreal Accord. However, no framework has been agreed upon, so the $33 billion in outstanding third-party ABCP, which has been at a standstill since August, will remain frozen until at least January 31, 2008.

Reportedly, there remains an impasse between the third-party ABCP providers and Canadian banks, which do not want to be forced to provide loans to the ABCP providers in order to alleviate liquidity problems.

Purdy Crawford, chairman of the committee, is optimistic an agreement will be reached by the end of January.

“I am gratified by the progress that all parties have made in addressing the key issues affecting our restructuring,” he said. “We have come a long way towards a successful outcome. I encourage our ABCP investors to allow us a short time longer to finish the task. The investors committee remains committed to delivering a final implementation of our restructuring in the first quarter of 2008, and I have every confidence we will get there.”

The investors committee did disclose some of the proposals that are under consideration. As was announced at the time of the Montreal Accord in August, the restructuring aims to replace the ABCP with notes having a maturity similar to the maturity of the underlying assets.

The investors committee outlined that the $33 billion in frozen ABCP will be divided into three groups, which will have different solutions applied to them.

The first group is ABCP that is supported solely by traditional, unleveraged assets, which represents approximately $3 billion. The second group is ABCP that is supported by leveraged assets, unleveraged synthetic assets or a combination of leveraged and unleveraged assets; this group represents the bulk of outstanding holdings, at approximately $27 billion. The third group is ABCP that is supported primarily by U.S. sub-prime assets and represents approximately $3 billion.

Other proposals under discussion include a margin call credit facility to further enhance the credit quality of the new notes and an investment-grade rating of the restructured notes.

When and if an agreement is reached, it is targeted to close on or before March 14, 2008.

The delay has already caused spillover effects into the wider industry. Shortly after it was apparent that no proposal would be announced and the standstill period would continue, the Credit Union Centrals of B.C. and Ontario announced they would have to postpone the closing date of their planned merger because both credit unions have substantial ABCP holdings.

This is the second time the credit unions have had to extend the closing date. On September 21, they announced they were extending the closing date from October 1 to the end of year because their ABCP holdings remained frozen and their valuations unknown.

“We are eager to proceed with the merger,” said Daniel Burns, chairperson of B.C. Central. “However, we recognize that the valuation issue must be settled, and that is going to take more time than first anticipated.”

B.C. Central holds $23 million in non-bank ABCP within its $5.1 billion in assets. Ontario Central’s holdings of non-bank ABCP amount to $161 million within its assets of $2.4 billion.

The credit unions stressed that these investments do not affect the ability of the two centrals to meet their member credit unions’ liquidity needs, but the current trading halt in these securities makes it impossible to “quantify the relative value of each central with certainty.”

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

(12/17/07)

Mark Noble