ABCP Market Restructuring Getting Closer

UNCLAS SECTION 01 OF 02 TORONTO 000115 SIPDIS SIPDIS SENSITIVE STATE FOR WHA/CAN (RIOS) AND EEB (SIROTIC) DEPT PASS USTR FOR MELLE, MENDENHALL, SULLIVAN TREASURY FOR INTERNATIONAL AFFAIRS (TRAN) COMMERCE FOR 4320/ITA/MAC/WH/ONIA (WORD) E.O. 12958: N/A TAGS: EFIN EINV ETRD PGOV CA SUBJECT: ABCP Market Restructuring Getting Closer REF: (A) Toronto 87 (B) Toronto 81 (C) Toronto 66 (D) 07 Toronto 430 Sensitive But Unclassified - Please protect accordingly. ¶1. (SBU) Summary: The Pan Canadian Investors Committee has been working hard to persuade nearly 2,000 retail investors, who hold roughly 1% of the frozen C$33 billion third-party asset-backed commercial paper (ABCP) market, to support a long-term restructuring plan. On April 9, Vancouver-based Canaccord Capital offered to buy back at par C$138 million in short-term notes held by 97% of their clients. Medium-sized investors, whose assets total about C$4 billion, are reportedly hoping to either leverage a better deal for themselves or to buy more time by delaying the April 25 vote. On April 15, a court agreed to extend the creditor protection that had previously been granted the 20 ABCP trusts which issued the C$33 billion in ABCP. Unless the courts push the date back further, ABCP investors must vote on the restructuring plan by April 25. Whether the restructuring plan moves forward or not, we expect the non-bank ABCP liquidity crisis will prompt Canada to reform financial sector regulation. Federal Finance Minister Jim Flaherty plans to meet with major banks during the week of April 21 to discuss recommendations of the Financial Stability Forum. End Summary. -------------- Background -------------- ¶2. (U) The Pan Canadian Investors Committee, led by Purdy Crawford, spent the first week of April in consultations across Canada with nearly 2,000 retail investors, who hold roughly 1% of the frozen C$33 billion third-party (non-bank sponsored) asset-backed commercial paper (ABCP) market in order to gain their support for the committee's market restructuring plan. ABCP investors must vote on the committee's restructuring plan by April 25, but the deadline may be pushed out further if Crawford feels he has insufficient buy-in from these retail investors, as well as from corporate investors (numbering about 200),whose support counts as much as bigger institutional investors like Caisse de depot et placement du Quebec (ref (A)). -------------- Court Protection Extended -------------- �A;¶3. (U) On April 15, Ontario Superior Court Judge Colin Campbell, who is presiding over the ABCP market restructuring, agreed to extend creditor protection for the 20 ABCP trusts-turned-corporations under the Companies' Creditors Arrangement Act (CCAA) (ref (B)), from April 16 to May 31. The extension will allow time for note holders to vote on the proposed restructuring of 20 trusts on April ¶25. Under federal creditor protection law, the restructuring plan must be approved by a majority of the note holders, as well as by voting note holders who own at least two-thirds of the value of the ABCP. -------------- Retail Investor Bailout -------------- ¶4. (U) In response to the threat of independent retail investors voting against the ABCP restructuring plan, ABCP retailers are piecing together bailout offers for their clients. On April 9, Vancouver's Canaccord Capital offered to buy back at par C$138 million in short-term notes held by 97% or 1,430 of their clients, who each hold C$1 million or less. The Canaccord offer is dependent on the successful restructuring of the ABCP market, and combines market bids (roughly 60% of the value) from unnamed third-party sources assembled by the Royal Bank of Canada, with Canaccord funding top-ups (about 40% of the value) to achieve par value on the presently frozen investments. Investors will also receive unpaid interest, and Canaccord will reimburse investors' share of the restructuring costs. Canaccord's offer, which expires at the end of May 2008, is conditional on investors voting "yes" to the restructuring plan. As a result of the bailout, Canaccord will take a C$58.2 million pre-tax writedown in Q4 2008. Committee head Purdy Crawford told investors on an April 14 conference call that another bailout offer is likely to come as soon as this week from Vancouver-based Credential Financial for a further 335 individual investors. -------------- Corporate Investors Left out of the Deal -------------- TORONTO 00000115 002 OF 002 ¶5. (SBU) Canaccord's bailout plan does not help 28 corporate note holders and 15 individual investors, with more than C$1 million worth of the paper, who are reportedly angry to have been left of out the deal. While most corporate investors have more money at stake than retail investors, they have less leverage than the 2,000 strong group of retail investors, who can control the restructuring vote. As a result, financial institutions that sold them the notes have less incentive to bargain. Including its corporate clients in the bailout plan reportedly would have doubled Canaccord's bill. ¶6. (U) Companies like Toronto-based New Gold, Vancouver-based Redcorp Ventures, and Vancouver-based Universal Uranium reportedly have hundreds of millions of dollars locked up in ABCP. It is estimated that about 200 companies hold as much as C$4 billion of frozen ABCP. Some corporate note holders reportedly have asked the Ontario Superior Court to create a new class of investors to give them more leverage. The court reportedly refused their request on April 15. Other corporate investors are considering launching lawsuits against those who sold and structured the frozen notes. These note holders are only eligible for loans secured by their holdings. ¶7. (U) On April 22, some companies holding frozen ABCP reportedly will ask the court to delay the April 25 vote. The companies want more time to review the restructuring plan that proposes converting the short-term notes into new notes that will mature in 7 to 10 years (ref (B) and (C)). While note holders must surrender their right to file lawsuits if they vote in favor of the plan, Crawford told investors on April 14 that there is a possibility that cases alleging fraud could be allowed to proceed even if the restructuring wins court approval. ¶8. (SBU) Comment: While the 200 corporate investors cannot block retail investor support for a restructuring deal, they could tie up Canadian financial institutions in legal wrangling for years to come. Whether the restructuring plan moves forward or not, we expect the non-bank ABCP liquidity crisis will prompt financial sector regulatory reform. End Comment. NAY