John Greenwood

Monday, August 11, 2008

The Ontario Court of Appeal's failure to rule promptly on a proposed restructuring for $32-billion of frozen asset-backed commercial paper should not be viewed as a sign the judges are troubled by the controversial plan, says the brokerage firm that sold much of the financial product.

After two days of hearings in late June, the court was widely expected to issue a thumbs-up by mid-July. But now, more than a week into August, the court has yet to make a ruling, sparking concern especially among retail holders.

Most of the ABCP that ended up in the hands of individuals was sold by Canaccord Capital Corp. The Vanouver-based company has agreed to buy back the paper from clients with holdings of less than $1-million, but only if the restructuring goes ahead.

"I know the delay is difficult, but we believe it should not be viewed as a negative development," Mark Maybank, Canaccord's president and chief operating officer, said in a letter to its retail clients. "We remain confident that the restructuring process will reach a successful conclusion."

The letter was posted on the company's Web site last week.

But sources say the longer the delay the greater the likelihood of a negative decision from the court.

The restructuring calls for the frozen ABCP to be converted to long-term notes that would likely trade at a significant discount.

Since they are being bought out, retail investors are in favour of the plan, but it has attracted widespread condemnation from corporate holders, who own far more notes by value. They want the same deal as the retail investors. They are especially irked by a provision in the workout that provides blanket immunity from lawsuits for the companies that made and sold the stricken paper.

Lawyers for Jean Coutu Group Inc., Ivanhoe Mines Ltd. and others are trying to block the restructuring, arguing that the so-called legal release is illegal and unfair.

As a concession, the plan's backers introduced an amendment to allow certain fraud cases to go ahead. But the move did little to mollify critics, who argue that the fraud carve-out is merely cosmetic.

The court deliberations are getting plenty of attention and not just from ABCP investors.

Analysts warn of major ramifications if the restructuring fails, with losses spilling over into other markets as about $250-billion of credit default swaps held by the trusts that issued the stalled notes get unwound, potentially worsening the global credit crisis.

Justice Colin Campbell of the Superior Court of Ontario approved the plan in June, but the decision was quickly appealed. Observers predict the case will end up in the Supreme Court of Canada by the fall.

The part of the ABCP market not sponsored by banks collapsed last August after investors stopped buying and banks that had agreed to provide emergency liquidity failed to step up. Commercial paper markets ran into trouble worldwide, but only in Canada did the major players try to fix the problem with a restructuring that protects them from lawsuits.

When similar problems emerged in U.S. credit markets, regulators moved fast. U. S. attention is now focused on auction-rate securities which froze like Canadian ABCP and left investors on the hook.

Banks have been accused of misrepresenting auction-rate securities as "safe" and "liquid" investments when they knew that was not the case. Last week, Swiss banking giant UBS AG agreed to repurchase US$19-billion of the securities as part of a settlement with regulators.