December 19, 2008 / 2:35 PM / in 9 years

Canada and three provinces to backstop ABCP plan

TORONTO (Reuters) - The Canadian government and three provinces agreed on Friday to help fund a $32 billion restructuring plan for the frozen market for nonbank asset backed commercial paper, raising hope for a settlement after more than a year of negotiations.

The agreement comes a day after Deutsche Bank AG, Citigroup Inc and other foreign banks whose support is key to the restructuring, threatened to walk away from a deal that hinged heavily on government support.

The government's participation means that small investors may soon recover their money after waiting since the market for the troubled paper seized up in 2007, when concerns mounted about U.S. subprime mortgages.

Finance Minister Jim Flaherty said in a statement that the provinces of Ontario and Quebec had agreed to join the federal government to provide a senior funding facility. He did not provide any details on the facility.

"We expect that this will allow the investors and asset providers to achieve a stable and effective restructuring agreement," Flaherty said. "A successful restructuring agreement will protect financial stability and the health of Canada's financial markets."

The federal government first struck deals with Canada's two biggest provinces, Ontario and Quebec, then on Friday afternoon Alberta -- home to some of the institutions with the largest exposure to the at-risk ABCP -- agreed to help fund the plan.

The investor committee that has been trying to implement a restructuring plan said last week that it needed $9.5 billion in funding from "external sources" to complete the process.

The committee also said it expected to implement the plan in January, subject to approvals by key participants.

"Obviously it's a positive development for getting this thing closed, I won't say in a timely manner but at least in the near term," Colin Kilgour, a consultant who advises some holders of ABCP, said on Friday.

"It would be nice if they would provide more details on the level of support that they are going to provide, but having said that I am confident it will be sufficient to get the deal closed."

The plan is designed to enable investors to eventually recover at least some of their money. Small investors are eligible for special reimbursement programs, while larger players could hold or sell their new restructured notes.

The investor committee that has been working on a plan for the nonbank ABCP market ran into a roadblock earlier this year when the credit market tailspin worsened.

Pension fund manager Caisse de depot et placement du Quebec owns about $12.6 billion in seized up commercial paper.

Montreal-based National Bank of Canada and Levis, Quebec-based financial cooperative group Desjardins Group together have ABCP originally valued at about $4 billion.

In Western Canada, Edmonton, Alberta-based ATB Financial, the largest financial institution in Alberta, holds $1.1 billion in ABCP.

The Ontario provincial government owns about $645 million of paper that would be at risk if the market restructuring deal collapses.

Other investors that have been stuck in limbo with the frozen paper for 16 months include federal government agencies, a wide range of Canadian companies, and individuals who thought they were parking cash in safe investments.

Reporting by Frank Pingue; editing by Frank Mcurty and Jeffrey Jones

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