February 29, 2008 / 5:28 PM / in 10 years

BMO says trust repair talks ongoing, shares fall

VANCOUVER, British Columbia (Reuters) - Bank of Montreal (BMO.TO) remains in talks to restructure two troubled asset-backed commercial paper trusts, BMO, Canada’s fourth-biggest bank said on Friday, adding that it doesn’t yet know if it faces further losses.

The market took little comfort from the news, lopping more than 4 percent off BMO’s stock price as the bank also said it could face litigation should the restructuring of the two trusts, Apex and Sitka, fail.

BMO warned last week that it might have to write down its remaining C$495 million ($505 million) exposure to the trusts, the ratings of which were cut to junk by agency DBRS a day ago. That possible writedown comes on top of a C$490-million pretax charge the bank said it will take in the first quarter because of various credit market-related problems.

The Globe and Mail newspaper reported on Friday that BMO, because of the possible additional writedowns, has “signaled” it may pull out of a broader repair job being done on Canada’s broken-down nonbank ABCP market.

Sitka and Apex are not part of that restructuring.

The newspaper, quoting unnamed sources, said BMO officials recently told a group of investors trying to repair this corner of Canada’s money market that the bank may no longer be able to honor its commitment to contribute to a credit line.

The C$14 billion credit line is crucial to restructuring the seized-up C$33 billion market for ABCP not issued by Canada’s big banks. Without the financial lifeline, the repair may not be able to go ahead, pushing the market into default and spelling losses for investors.

Neither BMO nor a spokesman for the investor committee restructuring the ABCP market could be reached for comment.

“I don’t think (BMO) will withdraw and if they do there will be other solutions. So I am not that concerned,” National Bank of Canada (NA.TO) Chief Executive Louis Vachon told reporters on Friday after his bank’s annual meeting.

He declined to elaborate on alternative solutions.

National has the most exposure of Canada’s banks to the nonbank ABCP and is playing a central role in an attempt to restructure the market.

Four of Canada’s biggest banks, including BMO, are believed to have pledged up to C$2 billion to help to get that market working again after it shut down last August on fears underlying investments are exposed to U.S. subprime mortgages.

BMO’s stock was last down 4 percent at C$50.27 on the Toronto Stock Exchange, the biggest drop among the market’s bank shares. It is down more than 7 percent this week.

The bank said in a statement that it can’t predict the outcome of the trust talks. “It is not possible to determine the amount or probability of losses, if any, at this time,” it said.

Because of continued deterioration in credit markets, certain transactions that the Sitka trust entered into are now facing calls for additional financial support. A deadline for a collateral call expired at the close of business on Wednesday.

At the same time, the Apex trust failed to roll over notes that came due on that same date, meaning investors were not prepared to buy the securities.

BMO said there is a “cure period” of two business days available after a notice of default has been served on the trusts. It was not clear if a default notice has been filed.

Analysts said BMO has two choices: to provide collateral to the trusts and leave itself open to further cash calls, or refuse to bail them out and risk damaging its reputation in the market with clients who are invested in the trusts.

BMO is the biggest player in Canada’s securitization market.

If BMO let the trusts go into liquidation, it would be the first ABCP conduit in Canada to enter into a firesale, said Clarity Financial Strategy’s Daryl Ching, an expert on ABCP issues.

($1=$0.98 Canadian)

Reporting by Nicole Mordant; Editing by Peter Galloway

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