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Cablegate: Abcp Market Restructuring Getting Closer

VZCZCXRO1045
PP RUEHGA RUEHHA RUEHQU RUEHVC
DE RUEHON #0115/01 1082110
ZNR UUUUU ZZH
P 172110Z APR 08
FM AMCONSUL TORONTO
TO RUEHC/SECSTATE WASHDC PRIORITY 2447
INFO RUCNCAN/ALCAN COLLECTIVE
RUEHLO/AMEMBASSY LONDON 0056
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 02 TORONTO 000115

SIPDIS

SIPDIS
SENSITIVE

STATE FOR WHA/CAN (RIOS) AND EEB (SIROTIC)
DEPT PASS USTR FOR MELLE, MENDENHALL, SULLIVAN
TREASURY FOR INTERNATIONAL AFFAIRS (TRAN)
COMMERCE FOR 4320/ITA/MAC/WH/ONIA (WORD)

E.O. 12958: N/A
TAGS: EFIN EINV ETRD PGOV CA
SUBJECT: ABCP Market Restructuring Getting Closer

REF: (A) Toronto 87 (B) Toronto 81 (C) Toronto 66

(D) 07 Toronto 430

Sensitive But Unclassified - Please protect accordingly.

1. (SBU) Summary: The Pan Canadian Investors Committee has been
working hard to persuade nearly 2,000 retail investors, who hold
roughly 1% of the frozen C$33 billion third-party asset-backed
commercial paper (ABCP) market, to support a long-term restructuring
plan. On April 9, Vancouver-based Canaccord Capital offered to buy
back at par C$138 million in short-term notes held by 97% of their
clients. Medium-sized investors, whose assets total about C$4
billion, are reportedly hoping to either leverage a better deal for
themselves or to buy more time by delaying the April 25 vote. On
April 15, a court agreed to extend the creditor protection that had
previously been granted the 20 ABCP trusts which issued the C$33
billion in ABCP. Unless the courts push the date back further, ABCP
investors must vote on the restructuring plan by April 25. Whether
the restructuring plan moves forward or not, we expect the non-bank
ABCP liquidity crisis will prompt Canada to reform financial sector
regulation. Federal Finance Minister Jim Flaherty plans to meet
with major banks during the week of April 21 to discuss
recommendations of the Financial Stability Forum. End Summary.

----------
Background
----------

2. (U) The Pan Canadian Investors Committee, led by Purdy Crawford,
spent the first week of April in consultations across Canada with
nearly 2,000 retail investors, who hold roughly 1% of the frozen
C$33 billion third-party (non-bank sponsored) asset-backed
commercial paper (ABCP) market in order to gain their support for
the committee's market restructuring plan. ABCP investors must vote
on the committee's restructuring plan by April 25, but the deadline
may be pushed out further if Crawford feels he has insufficient
buy-in from these retail investors, as well as from corporate
investors (numbering about 200), whose support counts as much as
bigger institutional investors like Caisse de depot et placement du
Quebec (ref (A)).

-------------------------
Court Protection Extended
-------------------------

3. (U) On April 15, Ontario Superior Court Judge Colin Campbell, who
is presiding over the ABCP market restructuring, agreed to extend
creditor protection for the 20 ABCP trusts-turned-corporations
under the Companies' Creditors Arrangement Act (CCAA) (ref (B)),
from April 16 to May 31. The extension will allow time for note
holders to vote on the proposed restructuring of 20 trusts on April
25. Under federal creditor protection law, the restructuring plan
must be approved by a majority of the note holders, as well as by
voting note holders who own at least two-thirds of the value of the
ABCP.

-----------------------
Retail Investor Bailout
-----------------------

4. (U) In response to the threat of independent retail investors
voting against the ABCP restructuring plan, ABCP retailers are
piecing together bailout offers for their clients. On April 9,
Vancouver's Canaccord Capital offered to buy back at par C$138
million in short-term notes held by 97% or 1,430 of their clients,
who each hold C$1 million or less. The Canaccord offer is dependent
on the successful restructuring of the ABCP market, and combines
market bids (roughly 60% of the value) from unnamed third-party
sources assembled by the Royal Bank of Canada, with Canaccord
funding top-ups (about 40% of the value) to achieve par value on the
presently frozen investments. Investors will also receive unpaid
interest, and Canaccord will reimburse investors' share of the
restructuring costs. Canaccord's offer, which expires at the end of
May 2008, is conditional on investors voting "yes" to the
restructuring plan. As a result of the bailout, Canaccord will take
a C$58.2 million pre-tax writedown in Q4 2008. Committee head Purdy
Crawford told investors on an April 14 conference call that another
bailout offer is likely to come as soon as this week from
Vancouver-based Credential Financial for a further 335 individual
investors.

----------------------------------------
Corporate Investors Left out of the Deal
----------------------------------------

TORONTO 00000115 002 OF 002

5. (SBU) Canaccord's bailout plan does not help 28 corporate note
holders and 15 individual investors, with more than C$1 million
worth of the paper, who are reportedly angry to have been left of
out the deal. While most corporate investors have more money at
stake than retail investors, they have less leverage than the 2,000
strong group of retail investors, who can control the restructuring
vote. As a result, financial institutions that sold them the notes
have less incentive to bargain. Including its corporate clients in
the bailout plan reportedly would have doubled Canaccord's bill.

6. (U) Companies like Toronto-based New Gold, Vancouver-based
Redcorp Ventures, and Vancouver-based Universal Uranium reportedly
have hundreds of millions of dollars locked up in ABCP. It is
estimated that about 200 companies hold as much as C$4 billion of
frozen ABCP. Some corporate note holders reportedly have asked the
Ontario Superior Court to create a new class of investors to give
them more leverage. The court reportedly refused their request on
April 15. Other corporate investors are considering launching
lawsuits against those who sold and structured the frozen notes.
These note holders are only eligible for loans secured by their
holdings.

7. (U) On April 22, some companies holding frozen ABCP reportedly
will ask the court to delay the April 25 vote. The companies want
more time to review the restructuring plan that proposes converting
the short-term notes into new notes that will mature in 7 to 10
years (ref (B) and (C)). While note holders must surrender their
right to file lawsuits if they vote in favor of the plan, Crawford
told investors on April 14 that there is a possibility that cases
alleging fraud could be allowed to proceed even if the restructuring
wins court approval.

8. (SBU) Comment: While the 200 corporate investors cannot block
retail investor support for a restructuring deal, they could tie up
Canadian financial institutions in legal wrangling for years to
come. Whether the restructuring plan moves forward or not, we
expect the non-bank ABCP liquidity crisis will prompt financial
sector regulatory reform. End Comment.

NAY

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