Another Hurdle for ABCP Market Restructuring

UNCLAS SECTION 01 OF 02 TORONTO 000164 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: Another Hurdle for ABCP Market Restructuring REF: (A) Toronto 115 (B) Toronto 87 (C) Toronto 81 (D) Toronto 66 (E) 07 Toronto 430 Sensitive But Unclassified - Please protect accordingly. ¶1. (U) Summary: Ontario Superior Court Justice Colin Campbell, who is presiding over restructuring of the C$32 billion third-party asset-backed commercial paper (ABCP) market is considering how to resolve potential fraud claims. Foreign banks, whose support is crucial for the restructuring, initially said they would not support a deal that did not release them from future liability but have recently indicated they could support a deal that includes provisions for lawsuits based only on fraud. Some corporate investors have initiated or plan to initiate lawsuits against the retailers who sold them the ABCP. Barrick Gold reportedly settled a similar dispute with big-five Canadian bank CIBC on May 8. Regulatory bodies are beginning to investigate the behavior of ABCP retailers but have not yet publicly issued formal conclusions. End Summary. -------------- No Release from Fraud -------------- ¶2. (U) On April 25, 96% of the 2,000 ABCP note holders who cast ballots, mostly retail investors, voted in favor of the restructuring plan that will convert the frozen C$32 billion non-bank (third party) ABCP into new notes maturing within nine years (ref (D)). Many of the 200 corporate investors (ref (A)), however, withheld their support for the plan because they will not get as much of their investment back as small investors (who will receive 100 cents on the dollar through buyout programs for retail investors arranged by Canaccord Capital Inc. in exchange for giving up their right to sue for losses). Toronto's Hollinger Canadian Publishing Holdings, and Quebec-based Jean Coutu Group have reportedly said they will sue the ABCP-issuing institutions to recover their losses rather than settle for the limited compensation available to them under the restructuring plan. Vancouver-based First Quantum Minerals has launched a suit against HSBC Bank Canada for selling the paper. ¶3. (U) On May 16, following two days of hearings with over 20 mostly corporate investors groups, Ontario Superior Court Justice Colin Campbell announced he would not finalize his approval of the ABCP market restructuring before May 30. Before that date, Campbell is considering how to treat potential fraud claims under the ABCP market restructuring plan. He has already said the issuers and retailers of non-bank ABCP should not be completely released from civil liability under the Companies' Creditors Arrangement Act (CCAA) (ref (C)). Purdy Crawford, chair of the restructuring committee, told investors in April that alleged fraud cases might be allowed to proceed even if the restructuring wins court approval (ref (A)). Foreign banks such as Deutsche Bank, whose support is crucial for the restructuring, initially said they would not support a deal that did not release them from future liability. In the past few days, however, they reportedly indicated that they could support a deal that includes provisions for lawsuits based on fraud. They have made clear that their support hinges on the precise definition of "fraud." -------------- CIBC Settles with Barrick Gold -------------- ¶4. (U) On May 8, Toronto-based Barrick Gold and Canadian Imperial Bank of Commerce (CIBC),Canada's fifth largest bank, settled a dispute over C$66 million worth of Ironstone Trust-issued ABCP, which CIBC sold to Barrick. Barrick had demanded full repayment of C$66 million from CIBC, and was fighting in court for the right to sue CIBC for selling Barrick the now almost worthless paper. The terms of the deal remain confidential. A majority of the investors holding Ironstone-issued ABCP voted against the restructuring plan. Ironstone-issued ABCP, unlike that of the other 20 ABCP-issuing trusts, is backed by many subprime assets which make its notes worth between 5 and 12 cents on the dollar. Sources said a similar deal between CIBC and Chicago-based Sun-Times Media Group is also nearing completion. According to industry sources, some of CIBC's competitors quietly bought back bad notes from their valued corporate clients after the August 2007 meltdown. -------------- Regulatory Response -------------- TORONTO 00000164 002 OF 002 ¶5. (U) In response to complaints from retail investors, the Investment Dealers Association of Canada (IDA),the self-regulator for the securities industry, in April began a "compliance sweep" focusing on firms that sold non-bank ABCP. The IDA is investigating whether ABCP retailers met know-your client and suitability requirements. While the IDA can sanction brokers for inappropriate behavior, it does not have the power to recover lost funds. The Ontario Securities Commission (OSC),which has market oversight responsibility, is reviewing the compliance of issuers with accounting standards and disclosure requirements (required to provide investors with the level of transparency needed to make informed investment decisions). The OSC is also considering whether to mandate relief for the financial institutions and other retailers that have bought back ABCP from retail investors. ¶6. (SBU) Comment: Judge Campbell is apparently looking for a solution that will give the restructuring plan sponsors some comfort that they will not be significantly affected by fraud claims, while at the same time not shutting down fraud claims altogether, which would be unacceptable to a higher court. Some market watchers view the IDA's investigation as a public relations campaign with no teeth. We expect the non-bank ABCP liquidity crisis will prompt financial sector regulatory reform once the restructuring plan is finally complete, and the market again operating, sometime this summer. End Comment. NAY