Canadian ABCP restructuring faces last hurdle

Efforts to restructure C$32 billion ($30.6 billion) of Canadian asset-backed commercial paper (ABCP) moved closer to a resolution on August 18, when the Ontario Court of Appeal unanimously dismissed the claims of a group of corporate investors that opposed the plan.

The ABCP has 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 – formed by 17 financial and investment institutions that held approximately two-thirds of the paper - put forward a plan to restructure the short-term debt into three tranches of notes with maturities ranging from five to nine years. The scheme, applicable under the Companies’ Creditors Arrangement Act (CCAA), was devised by JP Morgan.

To succeed, the proposal needed the backing of investors holding at least two-thirds of the notional value of the paper, and two-thirds of the total number of noteholders (1,940), with each vote counted equal.

On April 25, 96% of investors decided to back a plan including a compromise deal, which would involve the repurchase of the restructured notes at par of the 1500 retail investors holding less than C$1 million in the affected paper. The Ontario Superior Court approved the scheme on June 5.

However, a group of corporate investors, each holding more than C$1 million of ABCP, lodged an appeal on June 25 with the Ontario Court of Appeal. Not prepared to wait up to nine years to get their money back, the group wanted the same deal that had been offered to retail investors. Their appeal centred on a controversial condition of the plan, whereby noteholders would give up the right to take legal action against dealers who sold them the notes unless fraud could be proven.

Purdy Crawford, chairman of the investor’s committee, said the condition was crucial to the proposal “because certain key participants have made comprehensive releases a condition for their participation”.

Legal representatives of the corporate investors claimed there was nothing in the CCAA that allowed for such a clause. However, the appeal was rejected by the three-member committee of the Ontario Court of Appeal, which said the June 5 court ruling was “fair and reasonable in all the circumstances”.

Taking into account the wider implications of the restructuring failing, the committee said there was room for interpretation in the CCAA: “An interpretation of the CCAA that recognises its broader socio-economic purposes and objects is apt in this case. The restructuring underpins the financial viability of the Canadian ABCP market itself.”

Taking into account the court rulings, and the overwhelming support for the restructuring by noteholders, the odds seem to be stacked against the appellants. Nevertheless, a small number – including Ivanhoe Mines and the Jean Coutu Group, a pharmaceutical firm – are preparing to take their case to the Supreme Court of Canada, the highest court in the country and final court of appeal.

Howard Shapray, co-founder of the Vancouver-based litigation practice Shapray Cramer, told Risk: “We are seeking leave to appeal. The court may agree to hear the appeal at its discretion.”

The Supreme Court, on summer recess, may reject the case outright, meaning the restructuring goes ahead as planned. Alternatively, as seems more likely given the importance of the issue, it might hear the case on an expedited basis. Either way, a source involved in the restructuring expects the deal to go ahead within the next two months.

“We are ready to close by the end of September, but if the Supreme Court needs to hear it that will likely cause some delay,” the source said. “But given the importance, an appeal probably won’t delay the process more than a month.”

The source argued the alternative to the plan – a firesale of assets at distressed prices – would be a disastrous outcome.

“Those appellants who would rather sue could wait five to 10 years to find out the result of the lawsuit, with no guarantees they would succeed,” he asserted. “If they want their money back, they need to go with the plan. But if they win their case, the plan fails and we see a liquidation of assets. In that scenario, investors will lose between 60% and 80% of their original investment.”

Daryl Ching, former managing partner at Clarity Financial Strategy, which provides advisory services to corporate and retail clients, supports the restructuring on the grounds that: “Sometimes you have to compromise to reach the best decision.”

He also believes larger corporate and institutional investors need to take greater responsibility. “They have smart people in charge of their investment programmes: for them to say they did not know these conduits invested in subprime mortgage-backed securities or collateralised debt obligations is just not acceptable,” argued Ching. “The onus is on those investors to do some due diligence, even if the products are AAA rated.”

See also: Power to the people
Retail investors hold key to Canadian ABCP restructuring