Monday, March 17, 2008

By Regan Ray

The committee assigned to sort out the troubled asset-backed commercial paper market in Canada filed an application to the Ontario Superior Court of Justice today, asking for bankruptcy protection for the trusts involved.

The Pan-Canadian Investors Committee for Third-Party Structured ABCP filed an application under the Companies' Creditors Arrangement Act (CCAA), a federal statute that allows for court supervision of debt restructuring.

The committee is asking for the court to call a meeting of ABCP noteholders to vote on its plan to restructure 20 of the trusts covered by last summer's Montreal Accord. The plan affects $32 billion in notes.

The committee confirmed that an understanding has been reached with “a group of Canadian banks” on participation in the plan. The committee said both binding and non-binding understandings have now been reached for more than 98.5% of the required margin funding facility, adding that it is confident it will reach firm commitments but has other means available should a shortfall arise.

“The committee has reached an understanding on the principal issues with all major participants in the third-party ABCP market on how to address the problems that are currently plaguing this market,” said Purdy Crawford, chair of the committee, in a release. “The CCAA process provides a court-supervised means of advancing the committee's plan for this comprehensive and simultaneous restructuring of all affected ABCP, giving noteholders an equal opportunity to vote on the plan under a court-approved process.”

DBRS downgraded the ratings of 20 trusts under the Montreal Accord to D, after the committee announced it had filed the application to the CCAA. DBRS has maintained since August that the credit quality of the majority of the assets held by the affected trusts is strong. “This continues to be true,” the ratings agency said today, in a release. “Today’s downgrade reflects the fact that the affected trusts are now subject to a court-supervised process which, if successful, will see the obligations of the affected trusts be restructured per the terms of the framework agreement.”

DBRS noted that a CCAA filing is somewhat similar to one under the Bankruptcy and Insolvency Act (BIA), yet under the BIA, the goal of the bankruptcy process is to maximize the value of the remaining assets for the benefit of creditors, while under the CCAA, the objective is for the entity to remain viable. “Bankruptcy proceedings often end with a liquidation of the bankrupt’s assets, whereas one of the goals of a CCAA filing is to avoid liquidation of the assets,” it said.

According to CCAA rules, the plan must be approved by a majority of noteholders (regardless of the size of their holdings) that vote at the meeting, as well as by noteholders representing at least 66 2/3% of the total aggregate principal amount of affected ABCP voting at the meeting. Upon approval, a further hearing will be held before the court for its final sanction of the plan.

“Details of the restructuring plan have now been substantially completed,” said Crawford. “The committee is unanimously supporting the Plan, and I am recommending that all noteholders approve the plan in order to avoid a forced liquidation of conduits and the significant losses that would likely ensue if the plan were not to move forward.”

According to the committee the plan, which was announced in December, would give noteholders an improvement in the potential for value recovery over time, a lower risk of margin calls, investment grade credit ratings for the vast majority of the new notes and improved transparency with regard to the underlying assets.

The committee said that all underlying assets in affected ABCP backed by synthetic and hybrid assets will be cross-collateralized into one of two Master Asset Vehicles (MAVs). Certain large noteholders that have agreed to self insure by contributing approximately $8.5 billion to fund any additional margin calls associated with the pooled assets supporting their pooled notes, will participate in MAV1. As well, noteholders that satisfy eligibility requirements will also have the option to participate in MAV 1.

Meanwhile, all other noteholders will participate in MAV2, for which a third-party margin funding facility will be established. A group of Canadian banks has confirmed with the committee the terms of their participation in a larger syndicate for the MAV 1 and MAV 2 required margin call facility, according to a release.

The implementation of the plan is subject to a series of conditions, and certain government and regulatory approval will be required. Upon the CCAA filing, creditors of the affected trusts, including noteholders, will be stayed from enforcing their claims. This court-ordered stay will effectively replace the standstill agreement that was agreed to as part of the Montreal Accord.

DBRS said it continues to monitor the situation for further changes.IE