Industry reacts to ABCP roadmap

With a restructuring agreement finally in place, large holders of third-party asset-backed commercial paper (ABCP) now have a better understanding of the fate of the problematic paper and can inform their investors about what they intend to do with their ABCP holdings.

On December 23, 2007, the Pan-Canadian Investors Committee for Third-Party Structured Asset Backed Commercial Paper announced that an agreement was reached between 20 providers of third-party ABCP on what to do with the $33 billion in outstanding debt obligations that are currently frozen from trading until the end of January.

Purdy Crawford, chairman of the committee, which was formed in the aftermath of August’s Montreal Accord, believes the deal will allow most of the ABCP to be redeemed at face value.

“I am confident that this plan will provide most holders of outstanding commercial paper with the opportunity to receive the full repayment of principal by holding restructured notes to maturity. Importantly, based on the advice of JPMorgan, the committee’s financial advisor, most of these notes are expected to be AAA-rated. Since the beginning of the committee’s process, we have had as our objective the creation and preservation of maximum value for all investors,” he said.

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All of the ABCP will have its maturity extended to the termination of underlying assets. Since institutional investors originally bought the paper as short-term debt instruments, they still have to make a decision about whether they want to hold on to the restructured ABCP or try their luck selling it on the open market when a selling standstill period comes to an end January 31.

For those planning to sell, the agreement should give a better sense of the value of their holdings.

The investors committee says the restructuring will pool each eligible series of ABCP into one of two master asset partnerships. Each selected series of ABCP will be restructured on an individual basis. A margin funding facility of approximately $14 billion has been arranged through a combination of investors, dealer bank asset providers and certain Canadian banks.

The Master Asset Partnership 1 (MAP1) will be a pooling of eligible assets within series owned by investors who will participate in their pro-rata share of the MAP1 margin funding facility.

The Master Asset Partnership 2 (MAP2) will be a pooling of eligible assets within series owned by investors who elect not to participate in the MAP1 margin funding facility. The MAP2 margin funding facility will be provided by a group of investors and third-party lenders.

Not all the outstanding ABCP is eligible for these pools. Traditional securitized trusts, which represent about $3 billion, are considered the least risky type of ABCP and, the investors committee says, will mostly have a high credit rating. These trusts are going to be restructured on a series-by-series basis.

At the opposite end of the spectrum, $3 billion in riskier synthetic ABCP assets considered to have a high exposure to U.S. sub-prime mortgage loans will also not be eligible for the pools. These will be restructured on a series-by-series basis as well.

The investors committee anticipates that the deal will close by March 2008. A detailed description of the restructuring will be provided to all investors and will include material used by JPMorgan in its analysis.

The pending agreement was almost immediately welcomed by the Caisse de dépôt et placement du Québec, which reportedly has exposure to more than $13 billion in third-party ABCP.

“The solutions provided by the agreement serve the interests of the Caisse’s depositors,” said the Caisse’s CEO, Henri-Paul Rousseau, in a statement released the same day the agreement was announced.

The agreement seems to have prompted the giant U.S-based fund manager Legg Masonto to tweak its ABCP holdings in a Canadian liquidity fund, along with virtually eliminating its ABCP holdings in a Dublin-based fund. The company said it has agreed to acquire an aggregate of $99 million in principal value of conduit securities issued by Canadian ABCP issuers.

“These actions are further evidence of our continuing support of our liquidity products in light of current unprecedented market conditions. We will continue to monitor our liquidity funds carefully and may elect to take additional action in the future if we deem it appropriate,” said Raymond A. Mason, the company’s chairman and CEO.

In other ABCP news, on Wednesday, Home Equity Income Trust, the parent company of reverse mortgage lender Canadian Home Income Plan, said it has amended the liquidity agreement of the CHIP Mortgage Trust to achieve a global liquidity standard established by credit agency DBRS for its commercial paper holdings. As of December 31, 2007, $78 million of commercial paper was outstanding.

The trust’s commercial paper program is supported by a $120 million liquidity support arrangement provided by a syndicate of Schedule 1 Canadian chartered banks. The trust may have to utilize this liquidity line to fund maturing commercial paper.

“We appreciate the guidance provided by DBRS and our banking partners in helping us achieve the global liquidity standard which is vital to our ongoing business success,” said Home Equity Income Trust’s senior vice-president and CFO, Gary Krikler.

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

(01/02/08)

Mark Noble