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.

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No Release from Fraud
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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."

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CIBC Settles with Barrick Gold
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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.

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Regulatory Response
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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