After 17 months of delays, the saga surrounding the restructuring of C$32 billion ($26.1 billion) of distressed Canadian non-bank asset-backed commercial paper (ABCP) has finally drawn to a close.More than 2,500 retail investors, who individually held less than $1 million of the affected paper, were repaid their initial investment in full by brokers late last week. Individuals, corporates and institutional managers holding ABCP in excess of C$1 million have received restructured notes with maturities ranging from five to nine years. Approximately C$26 billion of the notes have been rated single-A by local rating agency DBRS - the same agency that originally rated the ABCP R-1, its highest commercial paper rating.
The ABCP - backed by a mix of traditional securitisation products and highly leveraged collateralised debt obligations (CDOs) - had been frozen since August 2007, when the non-bank conduits that issued the paper were no longer able to meet payment obligations to investors.
Following the freeze, the Pan Canadian Investors Committee - a collective of 17 financial and institutional investors that held approximately two-thirds of the paper - hired JP Morgan to come up with a restructuring solution. It was decided that converting the short-term paper into longer-term notes offered the best chance of investors recouping a significant chunk of their initial investment.
An immediate problem came from the need to not only secure the backing of investors holding at least two-thirds of the notional value of the paper, but also two-thirds of the total number of investors. That made it essential to get the support of the retail investors, who made up the majority of the noteholders, when the proposal was put to a vote last April.
Unwilling to have to wait nine years to get their money back, those small investors only agreed to vote in favour if their brokers committed to repurchasing the converted notes at par immediately after the restructuring was completed. With the plan amended to include such a clause, on April 25, 2008, 96% of investors voted in favour.
However, a further delay occurred when a group of disgruntled corporate investors who also wanted immediate repayment, but whose individual holdings exceeded C$1 million, took their case to the courts. Their claims were finally rejected last September, when the Supreme Court of Canada declined to hear their case, but the extreme period of volatility in the financial markets that followed Lehman Brothers' collapse led to further hold-ups.
Just when it looked as if the situation could drag well into 2009, the decision by the Canadian government in December to provide financial backing - committing to a C$4.5 billion senior funding facility along with the governments of Quebec, Ontario and Alberta - gave the plan the final push it needed.
On January 12, the Superior Court of Ontario granted a plan implementation order, paving the way to restructure the notes and repay retail investors. Brian Hunter, a Calgary-based investor who was repaid his initial C$658,000 investment last Friday, said he and other small investors were "relieved to be back where we should be, albeit with a few scars".
But those investors left holding the restructured paper could end up with losses, as well as scars. Approximately C$20 billion of the assets underlying the notes consist of subprime mortgage-backed securities and CDOs featuring leveraged super senior swaps. Such assets have collapsed in value during the financial crisis and a reversal of that trend seems unlikely.
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