Mystery buyers bail out Canaccord clients

It’s a happy day for the majority of Canadian retail investors who have their money frozen in asset-backed commercial paper — they are getting their money back. With the financial backing of anonymous buyers, Canaccord Capital announced the Canaccord Relief Program to repurchase, at par value, up to $138 million of restructured third-party ABCP from clients who hold $1 million or less.

“After many months of negotiating on behalf of our clients, Canaccord is pleased to offer a solution that provides them with par value on their ABCP investment. Clients will remain entitled to receive any unpaid interest to the extent it is payable pursuant to the restructuring plan and Canaccord will reimburse the share of the overall restructuring costs borne by our eligible clients,” says Mark Maybank, chief operating officer of Canaccord Capital Inc.

Canaccord has insisted that it could not buy back the ABCP on its own, and it still cannot do so. Instead, it has enlisted the help of anonymous institutions that will buy the ABCP if a proposed restructuring deal put forward by the Pan Canadian Committee of Third Party ABCP, headed by Purdy Crawford.

Under the terms of the deal, Canaccord will take a one-time after-tax charge of approximately $39.6 million or $0.82 per share to pay 1,430 of its clients approximately $138 million in frozen ABCP for full face value. It is assumed the mystery buyer will pick up the rest of the tab but only if the restructuring proposal is approved. The money and notes will go into escrow and clients are slated to get their money back upon the successful completion of a restructuring deal expected sometime in late May.

Clients will also receive any unpaid interest to the extent that it is available under the restructuring plan. Canaccord will also reimburse the eligible clients’ actual share of the restructuring costs.

“This is a significant charge to our earnings that reflects our commitment to resolving a very difficult process in the best possible way for our clients,” says Paul Reynolds, president and CEO of Canaccord Capital Inc. “We remain well capitalized and committed to our clients, which we believe we’ve demonstrated throughout this process. With these efforts behind us, we look forward to continuing to live up to our values and grow our business as a leading global investment dealer.”

Pressure had been mounting on Canaccord to find a way to get investors their money back. Not only did the firm have more than 1,400 retail investors — many with the retirement savings in jeopardy — but those investors had been threatening to vote down a restructuring proposal that would leave more than $32 billion in frozen ABCP in the lurch.

Those 1,400 investors represent the balance of power in the restructuring vote, so getting them on board with this deal would go a long way to ensuring the restructuring proposal is approved.

Securing votes does seem like the intent of this deal. Eligible recipients of the relief program represent 97% of Canaccord’s affected clients — but only slightly more than half of the frozen money.

The 3% of Canaccord clients not eligible for relief represent about $130 million, Maybank told analysts on a conference call on Wednesday. Most are institutional investors, although Maybank notes that 15 affected investors have more than $1 million invested in ABCP. Alternate arrangements are being sought for these investors.

“All of those clients will be eligible for a loan facility program we are putting forward,” Maybank says. “The non-corporate clients that are in that mix will also receive some form of top up that has equivalent monetary value to the top up received by eligible note holders.”

Maybank told analysts that the top-up for individual investors with $1 million was included in the charge for the relief program, but he did not elaborate why they were not eligible for the deal announced today.

Brian Hunter, an investor who has more than $650,000 frozen ABCP with Canaccord, says he’s cautiously optimistic about the deal.

He believes the affected investors will agree to Canaccord’s offer if the deal is as it appears. But all the details still need to be studied, he says, noting that there are 11 institutions that sold ABCP to retail investors, so that needs to be dealt with. He’s also not sure that all of the corporate holders of ABCP are on board.

“The restructuring still has to happen,” he says.

According to Diane Urquhart, an independent investment analyst and investor advocate heavily involved with the retail investors, the investor group that has been lobbying for remuneration will be consulting their lawyers to see if the deal is acceptable. She notes there are more than 300 investors who have their money frozen with Credential Securities.

“We’re not done,” Urquhart says. “There is still Credential Securities which has 335 families largely in western Canada but also in the Toronto region. That’s $48 million, so this is a benchmark for Credential to now step up to the plate and pay those 335 families as well.”

Juroviesky and Ricci, the primary law firm representing retail ABCP investors, has urged caution.

“While we welcome any offer that may relieve the burden currently being experienced by our retail clients, [Canaccord Capital’s] proposal indicates that the offer is subject to certain conditions that have not been publicly disclosed, and are not currently known by Juroviesky and Ricci, said lawyer Henry Juroviesky. “We accordingly urge our clients to not take any uninformed action until further direction from us, and we have had the opportunity to analyze all the details relating to the Canaccord proposal.”

Meanwhile, Purdy Crawford, chairman of the Pan-Canadian Committee, has released a statement, suggesting other firms that have retail clients invested in frozen ABCP find a way to offer a similar deal.

“We believe this is an important step in resolving the concerns of smaller noteholders,” Crawford says. “The Committee encourages other financial intermediaries who may have sold affected ABCP to small investors to follow Canaccord’s initiative and address the concerns of their smaller clients by providing liquidity solutions such as this one. The Committee is delighted that the restructured notes available under the Committee’s plan have provided a basis for renewed liquidity options such as this.”

Canaccord also announced that two senior executives will be departing the company in the wake of the ABCP deal. Effective immediately, Robert Larose, executive vice-president and head of Canaccord’s private client services, has resigned for “personal reasons.” William Whalen, executive vice-president and head of the fixed income group at Canaccord, has also announced his retirement from the firm.

Reynolds will act as interim head of private client services and oversee the process of recruiting permanent leadership for those business groups.

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

(04/09/08)