March 17, 2008 / 4:19 PM / 10 years ago

Canada ABCP restructuring takes major step forward

VANCOUVER, British Columbia (Reuters) - A Canadian court granted bankruptcy protection to 20 asset-backed commercial paper trusts on Monday, a move applauded by analysts as a major step forward in the drawn-out and complicated restructuring of the embattled market.

Justice Colin Campbell of the Ontario Superior Court granted a request from the committee working on a repair of the ABCP market, issued by groups other than Canada’s big banks, to halt any margin calls against the trusts until April 16.

The court ruling paves the way for investors to vote on the restructuring plan at a meeting expected in late April.

“This was a very necessary step... We are one step closer to the finish line,” Daryl Ching, founder of ABCP consulting firm, Clarity Financial Strategy, said of the ruling.

Canadian Finance Minister Jim Flaherty said in a statement he was pleased that the committee had finalized its restructuring proposal and urged all investors to vote on it.

Committee Chairman Purdy Crawford said the route of court protection was the “best alternative to minimize harm and maximize recovery for all investors.”

“The failure of the plan would ultimately lead to the forced liquidation of billions of dollars in assets and very depressed prices. This would in result in substantial losses to investors and a lengthy period of uncertainty,” Crawford said on a conference call with reporters.

Canada’s C$33 billion ($33 billion) market for non-bank ABCP seized up in August last year on investor concerns that the money market investments were exposed to U.S. subprime mortgages.

A committee of the biggest investors was hastily formed and has been working since then to find a way to prevent investors losing money, often missing their own deadlines along the way.

Earlier the committee said it has reached binding and non-binding understandings for more than 98.5 percent of a C$14 billion credit line facility, a crucial funding backstop needed to get the halted market functioning again.

It added that it was “confident it will reach firm commitments and has the means available to satisfy any remaining shortfall.”

The committee did not say who the “understandings” were with, or who would fund the shortfall. The Globe and Mail newspaper reported on Monday that one of Canada’s six largest banks, which collectively are reported to be contributing C$2 billion to the facility, kept delaying its formal approval.

Toronto-Dominion Bank, which previously said it didn’t believe it should shoulder a burden for a problem it wasn’t involved in, said in a statement it will provide financial support, although it wasn’t a material amount.

Investors in the ABCP include some of Canada’s biggest pension funds, National Bank of Canada, which is the country’s sixth biggest bank, small mining companies and individual investors. Their funds have been frozen under standstill agreements while the committee tries to devise a plan to get the market working again. The latest standstill agreement expired on Friday.

Lawyer Stephen Halperin of Toronto firm Goodmans, which has been advising the committee, said ABCP investors are expected to vote on the proposal in the third week of April. The deal, if approved, should close “sometime” in May, he said.

The restructuring, led by JP Morgan, plans to convert the short-term ABCP notes into longer-dated investments.

Underlying assets in trusts backed by synthetic and hybrid assets will be cross-collateralized into one of two “Master Asset Vehicles,” the committee statement said.

Some large noteholders have also agreed to self-insure by contributing C$8.5 billion to fund any additional margin calls associated with the pooled assets, it said.

Rating agency DBRS downgraded the 20 trusts to default, or “D,” on Monday but a DBRS official said this was a technicality.

“When a company files for (creditor protection), they are admitting that they are insolvent. According to our rating criteria, the appropriate rating is a ‘D’,” said Jamie Feehely, senior vice-president of Canadian structured finance at DBRS.

“But, in this instance, because it is quite unique, we do see this (the court application) as a positive development because the (restructuring) is progressing forward,” he told Reuters.

($1=$1.00 Canadian)

Additional reporting by Allan Dowd, Wojtek Dabrowski and Frank Pingue; Editing by Rob Wilson

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