Crawford Committee Seeks Retail Investor Support

UNCLAS SECTION 01 OF 02 TORONTO 000087

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: Crawford Committee Seeks Retail Investor Support

REF: (A) Toronto 81 (B) Toronto 66 (C) 07 Toronto 430

Sensitive But Unclassified - Please protect accordingly.


1. (SBU) Summary: On March 26, Purdy Crawford, Chair of the
Pan-Canadian Committee, described his committee's plan to
restructure the C$33 billion third-party (non-bank sponsored)
asset-backed commercial paper (ABCP) market to a crowd of over 500
financial sector leaders in Toronto. Crawford is working to
convince a majority of the 1,600 reluctant retail investors to vote
in favor of the restructuring plan on April 25. If the retail
investors do not back the restructuring plan, Crawford is afraid
that the market will unravel and there will be a fire sale. This
could increase instability in Canada's financial sector, which until
now has been affected relatively little by U.S. market events.
Financial sector insiders expect the non-bank ABCP market collapse
will prompt financial sector regulatory reform in Canada, but not
until the dust settles on a fully restructured and functioning ABCP
market. End Summary.


2. (SBU) On March 26, Purdy Crawford, Chair of the Pan-Canadian
Committee tasked with restructuring the C$33 billion third-party
(non-bank sponsored) asset-backed commercial paper (ABCP) market,
told more than 500 Toronto-area financial service leaders that
investors should back his committee's restructuring plan. Working
under temporary protection provided by an Ontario court on March 17
(ref (A)),Crawford and his committee must convince a numerical
majority of about 1,600 reluctant retail investors to formally
endorse the restructuring plan on April 25. Under the
court-sanctioned agreement, a numeric majority of all investors,
regardless of the value of their individual ABCP holdings (ranging
from C$150K for an individual note holder up to C$23.2 billion for
the Caisse de dptt et placement du Qubec),must approve the
restructuring plan in order for it to go forward.

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"Facebook Group"
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3. (SBU) A group of individual retail investors, referred to as the
"Facebook Group," who collectively bought C$269 million of the
short-term paper through Vancouver-based Canaccord Capital,
reportedly are pushing Canaccord and other vendors to ensure that
retail investors receive close to 100% of the value of their paper
before they vote on the restructuring plan in April. Crawford told
the Toronto audience that he was prepared to make a deal with these
investors, but could not guarantee 100 cents on the dollar. While
there were no retail investors on his committee, Crawford explained
that their omission was not intentional. The investor group only
came forward, he said, after 90% of the committee's work had been
completed. The committee is reportedly working to convince
financial institutions to loan investors up to 80% of the value of
their ABCP for up to nine years (the duration of the longer term
paper the investors would receive in exchange for their frozen
holdings).


4. (SBU) On March 26, the Facebook Group announced that they have
retained Toronto-based legal counsel and an investor advocate to
review the restructuring plan. The group's legal counsel reportedly
aims to negotiate a deal that allows retail investors to sell their
ABCP immediately at full face value. Under the committee's proposed
agreement, all investors will receive new notes, with long-term
maturity dates of up to nine years (the original notes matured in
three months),that better reflect the maturity of the underlying
assets (e.g., car loans and leases, mortgages and home equity loans,
as well credit card receivables). The Facebook group members claim
they are experiencing financial hardship because they do not have
access to their funds, which initially were invested in short term
savings products on the advice of their brokers. Crawford pointed
the finger at investment dealers, who, he says, wrongly advised some
investors to buy ABCP, whose complexity made it difficult for
individual investors to fully understand its risks and benefits.


5. (SBU) Investors are also reportedly balking at the proposed
deal's prohibition on lawsuits against the issuers and retailers of
the non-bank ABCP. The 20 trusts that issued the non-bank ABCP were
regulated by the Ontario Securities Commission (OSC - for
Ontario-based trusts) and the Autorit des marchs financiers (AMF -
for Quebec-based trusts). As part of the restructuring plan,
provincially registered trusts were pooled together into several
federally registered corporations, which could then be protected
under the Companies' Creditors Arrangement Act (CCAA). The Canadian
banks that provided the underlying assets packaged by the trusts are
regulated by the federal Office of the Superintendent of Financial
Institutions Canada (OSFI). Some of the underlying non-bank ABCP

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assets were provided by international banks that do not operate in
Canada, so are not subject to Canadian financial sector oversight.
The investment dealers who sold these investment instruments to
their clients are self-regulated through the Investment Dealers
Association of Canada (IDA).

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Crawford Optimistic
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6. (SBU) While the deal is not yet sealed, Crawford expressed
optimism that the committee would be able to strike a deal with the
retail investors. Crawford stressed that the underlying assets are
of relatively high quality (only 4 - 6% of the underlying assets are
linked to sub-prime mortgages),and should provide investors with an
income stream before the notes mature. Crawford said he believes
the plan benefits all stakeholders, including retail investors,
noting that all stakeholders, including large investors, have made
significant concessions to reach the current plan. Crawford
believes the plan will stabilize the market, enabling some investors
to sell their long-term notes and recoup some of their funds
upfront. The Crawford Committee is scheduled to meet with investors
again to sell the plan on March 31, April 1, and April 2 in Toronto,
Montreal, Edmonton, Calgary, and Vancouver. If the retail investors
do not back the long-term restructuring plan, Crawford said he fears
the commercial paper will be sold in a fire sale, which could
increase instability in Canada's financial sector (until now
affected relatively little by U.S. market events) and thus further
disrupt global capital markets.


7. (SBU) Comment: Given Crawford's personal credentials as a
heavyweight lawyer and former CEO, and his ability to negotiate the
restructuring plan to this point, financial sector analysts are
optimistic that he will be able to strike a deal with retail
investors, and resuscitate the Canadian ABCP market. The stability
of Canadian capital markets depend on it. If the deal - which would
be the largest of its kind that does not involve a government
bailout - goes through, the market could resume trading in the
summer. Financial sector insiders expect the non-bank ABCP market
collapse eventually will prompt financial sector regulatory reform
in Canada, but not until the dust settles on a fully restructured
and functioning ABCP market. One outcome of the ABCP market
experience may be to give more thrust to the federal government's
goal of creating a single national securities regulator. End
Comment.

NAY