Friday, May 9, 2008

With Barrick and Sun Media Made Whole - Who’s Next To Try and Push the Nuclear Button?

By: Ross Hendin, Hendin Consultants

The ABCP saga has now taken a new turn - one where have seen a few things worth noting, the most important of which is that the squeaky wheel is getting the oil.

1) It has been said that Barrick is in a unique position because of its Ironstone holdings. For clarification, Ironstone series B notes (which are the ones in question) are presently valued at less than $0.13 by JPMorgan, and are stricken with sub-prime exposure that Barrick was not told it had. As Barrick and Sun are going to be made whole, presumably because of their strong legal footing for a case against CIBC, what will happen to the other Ironstone noteholders - the ones that haven’t had the presence or wherewithal to post such serious opposition to the restructure and CIBC? As the retail clients and now Barrick have shown the market - only the most dangerous groups ready to push the nuclear button are the ones that will see anything about of the restructure, just who will be the next to go nuclear and seek a bailout?
1)Shouldn’t everyone holding that paper get a bailout as well? Presumably, misrepresentation was committed to get others involved in the notes, and depending on how the Court sees the circumstances and limits the blanket release for the Banks, we still have a 750 million dollar problem with respect to Ironstone that will need to be dealt with.

2) Is the Barrick / Sun bailout a question of their particular situation, or their resources? If it was their resources, I’d bet that class action counsel and litigation investors could find value in motions on behalf of the smaller Ironstone noteholders - of course, they’d also find a few enemies on Bay Street for even considering it. Bay Street, and now the Government, have gone to untold lengths to make sure the story behind what’s really happened here sits behind closed doors, and given how far they have gone so far, I’d imagine they would stop at nothing to keep it that way.

3) As I have started to mention in point 2, I am very curious to know exactly what would motivate CIBC to go from kicking up dust with one of its biggest and most high profile clients to having one of their senior-most executives sit down with the client and figure out a strategy to make them whole? I would call it great PR if this executive did the same with all their clients in this situation, but since the bank is leaving so many corporates out to dry, and since they were toe-to-toe so publicly, we can only imagine that Barrick not only had a great case, but that the bank has noted that Barrick (and perhaps other unknowing noteholders) are really the ones holding the cards.

So, we will wait and see what Justice Campbell says on Monday, but for now the ABCP situation has avoided another disaster.

Wednesday, April 30, 2008

After the vote, is the end really in sight?

By: Ross Hendin, Hendin Consultants

According to this article, almost 96% of the noteholders voted in favor of the restructure, but that in no way means that it’s going to happen right away.

A few corporate noteholders are upset at what's happened to them – that either they feel the restructure itself isn’t fair, or the reason they hold the product in the first place because of unfair play on the part of their banks. In an effort to join the retail clients and also be made whole, some of them have tried to band together while others are making claims on their own – which may prevent the restructure from happening on time – by their first asking that they become their own class of noteholders (and therefore have veto power) and presently by asking the Court to limit the scope of the restructures legal releases, so the corporates can sue the banks for fraud, gross misrepresentation, and other issues around how they found themselves holding ABCP in the first place. According to this article in Bloomberg, Benjamin Zarnett, who represents the Committee, told the Court that the banks that agreed to provide back-up financing to the for the new notes will withdraw their support if the releases are trimmed.

The vote was allowed to go on as planned, but now that the vote has happened, the Court is in an awkward situation: caught between the rights of corporations, the broadest legal release ever in a CCAA agreement, and the reality that if a $32 billion dollar market melts down, the repercussions will be massive and international.

If it's possible, this has become a far more dangerous game of Chicken than the retail investors played. The stakes are much higher, as the focus will ultimately return to the Banks - the last place anyone on Bay Street wants them to be. Criticism for the plan itself is really superficial next to the illegal undercurrents that companies such as Barrick are pointing to, and it makes me wonder what will happen when the time comes for everyone to put their confidential documents in front of the Court in an Examination for Discovery. According to their motion, Barrick says that CIBC confirmed that their investments didn't have subprime exposure, when in fact they did. Barrick also makes a point of saying that they bought more paper just prior to the market freezing - which made me wonder if that purchase was made before or after the release of the now infamous Coventree letter.

Barrick also state that they were misled by the Investors Committee, saying it didn't come through on a deal to allow Barrick to retain litigation rights.

So, to give some context, what Barrick is saying isn't that they want to hold up the process, see this melt down, or have a nuclear button they can push to hold everyone hostage, what they are saying is that they feel strongly they have been wronged, and they want the right to be able to seek vindication for it.

This to me turns the Barrick / CIBC situation into a game of Chicken. CIBC may be assuming that Barrick and the other companies like it aren't going to be able to sue, so they are sitting tight. If CIBC were to try and make them whole, there are probably a number of other clients who would line up behind Barrick for the same treatment, and even more scary, the corporate clients of the other banks would go to their account managers and say "if CIBC is doing it, why aren't you" - the domino effect so begins. It's therefore in CIBC's interest to wait it out for a while, and hope that Barrick, Jean Coutu, Transat AT, Redcorp, and the many others involved in this corporate noteholder offensive are tainted as the companies trying to ruin the process for the market and are pressured or decide to back down.

From the corporate noteholders perspective, pushing to be able to sue is critical because they aren't concerned about the new paper as much as they are annoyed that they are in the situation in the first place. They are pushing here for transparency and to call the bank out because their banks may have sold products they either didn't know enough about, or knew about and didn't share the information with their clients. To the corporates, it may be worth holding up the restructure another few weeks and risking looking selfish to get to the bottom of the problem and push to be made whole, or open the Pandora's box that is the actions of the banks before the market freeze. If they are successful in being able to sue, I'm sure that CIBC will either threaten to walk from the margin facility, or will fold on the case very quickly and make them whole. Why? Because I'd bet CIBC cannot afford to let this suit get to an examination for discovery - a process by which Barrick and eventually the Court will be able to seek disclosure for internal documents.

And so, if the Court rules that the banks can in fact be sued for fraud and actions that put their clients in the midst of the freeze, there is a good chance that CIBC and maybe other banks will walk from the facility and once again the risk returns that the market will meltdown. Even if that (hopefully) doesn't happen, what it does is open up the banks to a lot more questioning and scrutiny by their clients. Over-regulation and transparency by Flaherty going forward will be the least of their problems, as they will have to decide between finding the money to make their clients whole and risking the Court, and the court of public opinion, see what really happened in the months before the meltdown.

A reality exists that it’s in everyone’s interests to have the restructure happen, and then have the banks buy the new notes from the clients and make up the difference in their value, than it does to put the entire process at risk like this.

The story is taking now taking a turn to litigation and public relations strategy. Every word and every motion on the side of the Banks will be essential to their survival in this period of the ABCP saga, just as it will make the difference for the corporates between being remembered as “commercial crusader” or “that company that sparked the largest financial meltdown in Canadian finance history”.

Ross Hendin is CEO of Hendin Consultants, and is a Senior Advisor to the Canadian office of a leading multi-national PR firm. With strategic communication experience in more than 20 countries around the world, Ross specializes in litigation, financial and political strategic communication. He has worked in the ABCP niche since 2006. Hendin Consultants is in Toronto and London, UK, and is on the web at Email Ross at

Monday, April 28, 2008

Not quite out of the woods yet

By: Daryl Ching, Clarity Financial Strategy

Although we have received a majority Yes Vote, there are still a couple obstacles before Mr. Crawford's Committee can move forward with the restructure. Justice Campbell has committed to continue hearings on a case by case basis from corporate note holders who are refuting the legal release. Justice Campbell will give his final ruling on fairness to move the plan ahead on Thursday.

It is expected that some corporate note holders such as Barrick Gold may seek appeals if legal immunity is granted to the various parties. The appeals might escalate the restructure to the Supreme Court of Canada. This could potentially cause a delay in the restructure for months.

Thursday, April 24, 2008

Vote on ABCP Restructure Plan to proceed tomorrow

By: Daryl Ching, Clarity Financial Strategy

I will be on the Business News Network tomorrow 10:35 AM EST to discuss this in more detail.

Despite efforts from corporate note holders over the last couple days to delay the vote and be treated as a separate class under CCAA, Judge Campbell decided to proceed with the vote on the restructure plan tomorrow in its current form. With Canaccord’s and Credential’s relief plans in place, a majority vote for Yes is a foregone conclusion. In all likelihood, the court will approve the restructure on May 2 after the vote, and we can expect a secondary market for the restructured notes to open in June 2008.

Shortly after news of a retail relief plan, corporate note holders started to raise their voices about unfairness and how they were caught in the middle with no buyout. Several motions were filed to delay the vote, be treated as a separate class under CCAA with veto power and to be waived from the legal release. All these motions have been denied, because Judge Campbell felt they would cause a failure of the restructure plan, which would have catastrophic consequences for a large number of parties.

However, Judge Campbell agreed to conduct a fairness / sanction hearing after the vote to review the legal release on a case by case basis. The legal release is an extremely important component of the restructure and was required in order to bring the various parties to the table and have them make concessions. To remove the legal release, would be a material enough change to the restructure plan, that they would need move to square one, or even worse, the parties would walk away from the restructure.

In my opinion, it is going to be extremely difficult at this point for current note holders to pursue litigation. They will likely need to be able to prove fraud or gross misrepresentation of the ABCP to be successful. The various bank dealers will point to the fact that the ABCP crisis was a systemic issue, with multiple parties to point the finger at.

Thursday, April 17, 2008

April Could Have Been The Month Of The Corporate Crusader

By: Ross Hendin, Hendin Consultants

Since the announcement that most Canaccord clients were going to be made whole, a number of groups have thrown their arms up and demanded the same treatment. Of course, because the Committee has been hands-off of the buyout, it has very much been every group for themselves in front of the Ontario Superior Court, to challenge the CCAA in whatever form they can.

The Credential Securities noteholders, who are exactly like the Canaccord clients except their numbers are too small for them to have a material impact on the vote itself, may also be finding a buyback offer on the table imminently.

Where does that leave the corporate noteholders that I spoke about here, or the ones that are attacking National Bank directly? According to this article, Montreal Businessman Hy Bloom and his counsel were pushed out of court for reasons including the potential economic chaos and impact on thousands of Canadians if the Plan fails. I know that other counsel representing other companies have also put forward motions, but as of now, those motions have not delayed the vote.

According to this article, the next move may be to wait until after the restructure is complete, and then go after the Committee and / or the groups that were apart of the "systemic breakdown". Mr. Crawford is apparently expecting that to happen, which I can only assume means that the parties to the ABCP market are also bracing for a legal battle to begin.

From a PR perspective, the idea of biding time now seems like a good one for the corporates. On the one hand, using PR in these weeks to discuss corporate unrest and the damage that this freeze has caused companies may seem somewhat irrelevant next to the needs of the retail clients, but as the vote successfully concludes and the notes are restructured, we may end up seeing a number of corporations take a legal avenue. If they all do it at once, every one of those companies will probably lose the chance to tell their story to the court of public opinion, and in fact, the market itself may become bored of the story and choose not to cover it.

It leaves the many companies that will be involved in this without the upside of visibility.
As I've said, April is the time for smart corporations to be pleading their case to the media, and to consider discussing possible ways that they will take legal matters into their own hands. The University of Western Ontario's Pension Fund could have organized a rally, telling their students that their professors have lost millions to this Canadian black-box investment. Mining companies could have shown videos of the mines that are no longer working as a result of the liquidity crunch, etc. And all of it, at the right time, would have made them corporate crusaders after the successful vote, when they decide to "invest in justice" rather than simple stay quiet and "throw good money after bad".

Wednesday, April 9, 2008

Yes Vote locked down by Canaccord relief plan, but what’s next?

By: Daryl Ching, Clarity Financial Strategy

Canaccord has agreed to buy back ABCP from all their clients holding $1MM or less on the condition of a successful restructure, which represents 97% of their retail clients. Canaccord has agreed to top up a market bid, which is in the range of 60% from an unidentified investor. Assuming that retail clients accept this deal, this is closest we have ever been to securing a Yes Vote locking down 1,430 votes in favour.

While many numbers have been thrown around, there remains another 800 or so retail clients and 300 institutional and corporate clients that have not yet received the benefit of a relief plan. However, the reality has become that they will need to operate under the assumption that restructure will be approved and all terms and conditions will be binding on all note holders, including the legal release. Instead of asking the question of “Should I vote yes or no?”, the more important question to ask now is “What are the implications of a yes vote and what do I do with the restructured notes?

Note holders who receive restructured notes will need to get educated and form a view on the value of their holdings. This is not an easy task, as the value varies across trusts. Market conditions have changed significantly since JP Morgan’s report dated March 4, 2008. Note holders will have three choices: 1) Sell the notes right away in the secondary market, 2) Hold the notes for an interim period and sell when a secondary market becomes more developed, and 3) Hold the notes to maturity. In order to make that decision, note holders will need understand all the underlying assets, how to value them, and place a value on the structural components added by the Crawford Committee like the move to the spread-loss trigger and the $14 billion margin facility. Even if the decision is to sell, this will help them determine a fair value when negotiating with potential buyers.

The ABCP situation has been a huge roller coaster ride with different twists and turns coming out virtually daily. However, this is a key turning point and we are closer than we have ever been to a certainty of a complete restructure. We urge note holders to get educated, figure out the value of the notes being held, even if it is just for accounting purposes, and make an informed decision.

There may be sunshine over the hill after all

By: Daryl Ching, Clarity Financial Strategy

There have been some important recent developments in ABCP restructure. CIBC announced yesterday that they have agreed to contribute $300MM to the margin facility filling the final gap to an aggregate of $14 billion, joining the other five big banks in Canada. National Bank also announced that they will be extending credit facilities to 100 of its business clients of up to 75% of their ABCP investments for two years with extendible terms. Canaccord and Credential Securities have announced that they are very close to finalizing a relief plan for their retail clients. The Crawford Committee announced that they will be hosting a conference call on Monday.

Why are we seeing such positive developments now? First, participants must be fairly confident that the relief plan for retail investors will be accepted and therefore they are confident about a Yes vote. I also make this assumption because of the scheduled conference call by the Crawford Committee. I can’t imagine any reason why the Committee would agree to host another conference call for note holders at this time if there is no new news to report after the tough road show they just completed. They must be expecting a relief plan to be finalized by the end of this week.

What this means is that a group of institutions have agreed to step up and take on the restructured notes. It is also important to note that the credit environment has significantly improved over the last couple weeks. Credit spreads have tightened significantly. As an indication, if you look at the TSX, it seems to have stabilized and we are not seeing 300-500 point swings like we saw earlier this year. Many analysts have predicted that we have seen the worst of the credit storm.

If we assume that the credit markets have stabilized and we will not see the swings we saw in January and February, then there is greater confidence that the addition of the margin facility and the move to spread-loss triggers will be enough to ensure the new notes receive full par plus interest at maturity, which is expected to be in nine years. Further to that, current note holders who are hoping to sell their notes in the secondary market can also expect bids from potential buyers to be higher.

The Crawford Committee continues to work at dotting i’s and crossing the t’s on the restructure plan. As an example, we still do not know if the interest rate will be based on 1-month BA’s or 3-month BA’s. The restructure plan also indicated that there are several trades still being negotiated with certain bank counterparties – CIBC being a key one, which appears to have been resolved yesterday. The Committee is also working on populating the E&Y Data Room.

At Clarity, we are now much more confident about a successful ABCP restructure. It has been a roller coaster ride with positive and negative news coming out almost daily. Although we recognize that there is no certainty until after the vote on April 25, there just may be sunshine after the hill after all.