ABCP Appeal Could Delay Settlement Implementation

UNCLAS TORONTO 000204 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 Appeal Could Delay Settlement Implementation REF: (A) Toronto 164 (B) Toronto 115 (C) Toronto 87 (D) Toronto 81 Sensitive But Unclassified - Please protect accordingly. ¶1. (SBU) SUMMARY: A group of Canadian corporations filed and has argued an appeal of Ontario Superior Court's June 5 approval of the restructuring plan for the frozen C$32 billion third-party asset-backed commercial paper (ABCP) market, claiming they were misled about the risks of the investments. It is unclear how long the appeal may delay the restructuring plan's implementation, which earlier was expected to be completed by the end of June. Purdy Crawford, chair of the ABCP restructuring committee, separately told Toronto business leaders in a closed-door session that he recommends carefully measured regulatory reform in response to the ABCP market collapse last summer. END SUMMARY. ¶2. (U) On June 5, after months of negotiations, Ontario Superior Court judge Colin Campbell approved the Crawford committee's restructuring plan of the C$32 billion third-party asset-backed commercial paper (ABCP) market, including a provision enabling noteholders to sue ABCP dealers for fraud. The 1,781 retail investors who hold C$215 million of the total C$32 billion ABCP market, will receive 100% of their money promptly under repurchase plans launched by Canaccord Capital and Credential Securities. The market's 200 corporate investors, however, will not be eligible to cash out on their investments immediately, but instead are to receive long-term notes that will mature in nine years (Ref A). -------------- -------------- Corporate Investors Appeal Ontario Court Decision -------------- -------------- ¶3. (U) A group of Canadian corporations has said they will fight the approved plan, claiming that they were misled about the risks of ABCP and should be able to sue for damages. Their appeal was heard in the Ontario Court of Appeal on June 25-26. The investor group is comprised of private and public companies from across Canada. On June 23, one of the appellants, Transat A. T., dropped out, announcing it had struck a deal with National Bank of Canada. The bank has agreed to provide the company with a three-year credit facility for up to 75% of Transat's C$143.5 million ABCP holdings in exchange for Transat's agreement to drop its appeal. -------------- Calls for Measured Regulatory Reform -------------- ¶4. (SBU) ABCP restructuring committee chair Crawford has called for measured regulatory reform in response to the collapse of the market. He cautioned that regulatory reform must balance risk and market efficiency, as well as be globally integrated. Crawford plans to appear before the House of Commons' finance committee in the near future to provide his recommendations on regulatory reform. Crawford and other market experts are calling for improved transparency for noteholders and investors at large. Under current regulations, ABCP and other short-term debt issuances do not require prospectus disclosures. Regulatory bodies such as the Investment Dealers Association (IDA),continue to investigate the behavior of ABCP retailers. Though the IDA can sanction brokers for inappropriate behavior, it does not have the authority to recover lost funds (Ref A). ¶5. (SBU) COMMENT: Legal experts have been reluctant to speculate on the possible outcome of the appeal, but clearly it will force further delays before final resolution of the ABCP market. If unsuccessful at this level, the appellants could still take their case on to the Supreme Court of Canada (SCC). The extent of the delay will also depend on how many appellants actually go to court, as some may just be using the appeal as leverage in settlement negotiations with lenders (The same tactic was used unsuccessfully by bondholders opposing the BCE (Bell Canada) leveraged buyout). Analysts tell us they believe the stability of Canadian financial markets depends on the restructuring plan's success. Retail investors reportedly remain optimistic that the restructuring plan will proceed since 96% of investors voted in favor of the plan. END COMMENT. NAY