Canadian ABCP Market Under Bankruptcy Protection

UNCLAS SECTION 01 OF 02 TORONTO 000081

SIPDIS

SIPDIS
SENSITIVE

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: Canadian ABCP Market Under Bankruptcy Protection

REF: (A) Toronto 66 (B) 07 Toronto 430 (C) 07 Toronto 422

Sensitive But Unclassified - Please protect accordingly.


1. (SBU) Summary: On March 17, an Ontario Superior Court Judge
agreed to convert 20 Canadian trusts, which had issued C$33 billion
in non-bank sponsored asset-backed commercial paper (ABCP),into
corporations and to protect them from notices, lawsuits, and other
claims under the Companies' Creditors Arrangement Act (CCAA) until
at least April 16. To date, it is unclear where the assets
underlying Canada's ABCP physically lie -- whether in Canada or the
U.S. Analysts estimate the current average value of non-bank ABCP
at about 60% of their pre-August 2007 financial crisis value of C$33
billion. The expert committee working to restructure the non-bank
ABCP market has not yet unveiled detailed terms of its restructuring
plan designed to convert the short-term asset-backed notes into
longer-term bonds, though investors will reportedly be asked to vote
on the plan by the end of April. Canadian investors, protected by
the early freeze of the non-bank ABCP market and a commodity-heavy
national stock exchange (TSX),have so far been spared some of the
visible turbulence of the U.S. financial markets, but even without a
sub-prime mortgage crisis of their own, some significant Canadian
investors (including federal and provincial pension funds) may face
stormy seas when the non-bank ABCP market is unfrozen. End Summary.


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Bankruptcy Protection
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2. (SBU) The non-bank ABCP market has been frozen since last August.
On March 17, in an unprecedented move, an Ontario Superior Court
Judge agreed to convert 20 Canadian trusts, which had issued C$33
billion in non-bank sponsored (third party) asset-backed commercial
paper (ABCP),into corporations and to protect them from notices,
lawsuits, and other potential claims under the Companies' Creditors
Arrangement Act (CCAA) until at least April 16. The court
protection plan reportedly has the backing of Bank of Canada
governor Mark Carney and federal Finance Minister Jim Flaherty.

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Underlying ABCP Assets Remain Undefined
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3. (SBU) The ABCP marketplace has remained opaque because Canadian
federal or provincial governments impose few transparency
requirements on trusts, which originally issued the investment
vehicles, or on the non-publicly traded corporations into which
these trusts have just been converted. To date, it is unclear what
specific assets underlie the non-bank or the bank-backed ABCP,
beyond the fact that they include mortgages (some subprime),car
loans, and credit card debt, making it difficult to assess what
portion of those pooled assets is physically located in Canada, the
U.S., or some other foreign country.


4. (SBU) Analysts estimate the current average value of non-bank
ABCP at about 60% of the pre-August 2007 financial crisis value of
C$33 billion. The 20 newly-formed corporations have been downgraded
by Canada's Dominion Bond Rating Service (DBRS) to a D rating. The
Crawford Committee of major investors (led by Toronto lawyer Purdy
Crawford) who have sought a consensual solution to the crisis
triggered by the subprime mortgage meltdown since last August, has
been unable to obtain a second rating by another rating agency.
However, the underlying assets are considered to still have a better
than D rating. The bank-backed ABCP, which continues to freely
trade and is still fully backed by Canadian financial institutions,
is reportedly trading at 80% of its C$85 billion pre-August value.


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Market Restructuring Plan Coming Together
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5. (SBU) On March 17, Toronto Dominion Bank, which had previously
refused to participate in the market restructuring (ref (A)),
announced that it agreed to back the C$14 billion back-up credit
facility for an unspecified amount. The Crawford committee, which
has been working to restructure the third party ABCP market since it
was frozen in August, has not yet unveiled detailed terms of its
restructuring plan designed to convert the short-term asset-backed
notes into longer-term bonds. In December 2007, the committee
announced a restructuring framework that calls for value
preservation and market transparency of the underlying assets to
promote liquidity and market confidence in the new notes or bonds
that will be issued. The bonds, which will mature in 7 to 10 years,

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are intended to allow investors to recoup much of their money (ref
(A)). If the restructuring works, which is the biggest in Canadian
history, Canada reportedly would be the first country to complete a
successful market restructuring without a government bailout.


6. (SBU) Under the protection of CCAA, the Crawford Committee will
call a meeting of ABCP investors (note holders of the affected
trusts) to approve the committee's restructuring plan. The
restructuring plan will be mailed out to all note holders and they
will be given approximately 30 days to vote on the plan. The plan
must be approved by a majority of note holders, regardless of the
size of their holdings, as well as by note holders representing at
least 66 and 2/3% of the total aggregate principal amount. Under
court protection, investors are prohibited from suing any financial
institution that sold the frozen short-term notes. Many individual
investors reportedly hold non-bank ABCP notes; C$21 billion is
reportedly held by Canada's major financial institutions and federal
and provincial pension funds.

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Investors Are Concerned
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7. (SBU) Critical independent investors are worried that their
money, which was initially invested in ABCP for short periods of
time (e.g. three months),will be tied up for too long in the
restructured bonds, and that they will still lose much of their
principal investment. The same investors are concerned that
Canadian banks may eventually face liquidity crises which could
prompt them to back out of guaranteeing the market. Market analysts
have expressed concern that the crisis may ultimately spread to the
C$85 billion Canadian bank-sponsored ABCP market. Canadian Imperial
Bank of Commerce (CIBC) and Bank of Montreal (BMO) could face
further billion-dollar write-downs related to investments in U.S.
subprime mortgages and non-bank ABCP (ref (A)),but analysts believe
Canada's large banks are basically healthy because they derive most
of their profits from old-fashioned retail banking, and did not
issue subprime mortgages in Canada.

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Spill-over from Bear Stearns?
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8. (SBU) Over the past four years, Bear Stearns issued C$2.65
billion in Maple bonds in Canada, and investors are worried about
their risk level (Note: Maple bonds are Canadian-dollar-denominated
bonds issued in Canada by foreign companies. End Note). Bear
Stearns offered 11 issues of fixed- and floating-rate Canadian
dollar-denominated debt, which it sold through the brokerage arms of
the Bank of Nova Scotia and Royal Bank of Canada (RBC). Vancouver's
Phillips Hager & North Investment Management, which RBC is in the
process of taking over in a C$1.36 billion deal, is reportedly the
largest holder of several of the Bear Stearns Maple bond issues. As
the new owner of Bear Stearns, JP Morgan will reportedly guarantee
the Maple bonds. Last December, JP Morgan Chase also said it would
make up any short-fall in the C$14 billion line of credit being put
together by the Crawford Committee. It is still unclear to
investors here whether JP Morgan Chase's weekend acquisition of Bear
Stearns could reduce the former's liquidity enough to endanger its
agreement to back the Canadian non-bank ABCP market restructuring.



9. (SBU) Comment: Canadian investors, protected by the early freeze
of the non-bank ABCP market and a commodity-heavy national stock
exchange (TSX),have so far been spared some of the visible
turbulence of the U.S. financial markets, but even without a
sub-prime mortgage crisis of their own, some significant Canadian
investors (including pension funds) may face stormy seas when the
non-bank ABCP market is unfrozen. Canadian banks remain relatively
healthy - healthy enough that Royal Bank of Canada (RBC) was rumored
to be a possible buyer for Bear Stearns. We believe it will be
difficult for the Canadian federal government to resist investor
calls for Parliamentary hearings on the non-bank ABCP market in the
coming weeks. It is not clear whether the federal government will
require additional reporting and transparency requirements from
trusts or non-publicly traded corporations. End Comment.

NAY