Crawford Committee Extends Standstill Period - Commentary

By: Daryl Ching, Clarity Financial Stratetgy

Crawford's Committee put out a press release this morning at 12:45 AM calling it, "Pan-Canadian Investors Committee Announces Framework for Restructuring of Third-Party ABCP" on Canadian Business Online. Some new information has been presented. I will present the information followed by my commentary.

1) A syndication of a margin funding facility is being put together.

This means the Committee will not be able to waive all mark to market triggers for CDO transactions and will require a facility to post collateral if margin calls are made. An obvious question here is who is in the syndicate group?

2) The standstill period has been extended to January 31, 2008, with a plan to reclose the restructuring by March 14, 2008.

This means the Committee was unsuccessful negotiating an extension to March 2008 as they had hoped. The Committee has 47 days left to get all parties to agree to the terms and conditions of the restructure. It is obvious that various parties are growing impatient and may lay the hammer as early as January 31, causing an event of default and law suits.

3) There will be distinct restructuring solutions for three different types of assets: "(i) ABCP which is supported solely by traditional, unleveraged assets (approx. $3 billion), (ii) ABCP which is supported by leveraged assets, unleveraged synthetic assets or a combination of leveraged and unleveraged assets (approx. $27 billion) and (iii) ABCP which is supported primarily by U.S. subprime assets (approx. $3 billion)."

This is not enough information for investors to make an informed decision about whether this deal makes sense for them or not. I expect to see more information on the jumbo fund and how the assets would be split between senior and junior class notes.

4) In some cases mark-to-market triggers will be replaced by more remote spread loss triggers. However, in cases where mark-to-market triggers cannot be waived, a credit facility will be put in place to post collateral on margin calls.

Investors will need to assess whether the credit facility is large enough to cover the potential risk of margin calls given today's volatile credit envirnoment.

5) The restructured notes will come out with an investment grade rating.

6) The Committee will make a further announcement following agreement on difinitive terms sheet with all key stakeholders. An information package will be circulated to holders of ABCP following such an agreement.

Will we see another announcement prior to all parties agreeing to the terms?

7) The Globe and Mail indicated in a recent article that the big banks have agreed to put up $500 million a piece.

This is good news. Although the smaller investors do not represent a super majority of ABCP holders, there is absolutely nothing more vital right now than providing emergency funding to those participants who are cash strapped and have had their business operations impaired since August. How much of the $2.5 billion from the Big Banks will be used for the credit facility and how much will be provide the emergency liqudity funding for the small investors? How will this money be prioritized and allocated to the investors? Will this be enough to carry the investors through to March 2008?

It appears that great progress is being made by the Committee. Having the big banks step up and provide liquidity is a big success and provides some of the backup required to make this restructure a success. This press release looks and feels like the release back on October 15 when the Committee came out and said that great progress was being made and people should wait a couple more months for a solution. While I am confident that progress is being made and we are further down the road today than back in October, we are now at a critical point, four months after the market disruption where more information needs to become available for investors to make informed decisions about the restructure. Investors will no longer settle for the lack of transparency in the process that has been apparent to date. I expect Crawford's Committee is working through the weekend to come up with more information and I certainly hope that information becomes available as early as next week. I also hope to see more frequent updates on progress as we move forward.