Friday, December 21, 2007

Light at the End of the Tunnel

By: Daryl Ching, Clarity Financial Strategy

It sounds like we are seeing some real progress from Crawford's Committee. It was announced yesterday that Skeena Trust was successfully restructured with 98.7% of the principal and accrued interest as of August 15 being returned to the noteholders. John Greenwood of the Financial Post, wrote an article called ABCP Proposal Could Come Within 10 Days announcing that a restructure proposal with valuation of the holdings provided by JP Morgan could come within 10 days.

As I believe Mr. Crawford has learned his lesson from previously over promising and dissapointing the market, we have seen a recent reversal to under promising and over delivering. Earlier, Crawford announced that the Skeena Trust restructure may not complete by year end and that losses may exceed 2%. Now, people will applaud the completion of the restructure with a 1.3% loss.

Crawford’s Committee received some pressure the Canadian Securities Administrators as they revealed that they would be exercising more scrutiny on how public companies disclose their exposure to ABCP. Accurate disclosure can only come from full transparency on valuation from Crawford’s Committee. There is another strategic incentive for the restructure proposal to come out in December, similar to having an announcement on Friday at midnight. The note holders of ABCP are trying to wrap up for year end and go on their vacations for the holiday season. After four months of stress and uncertainties, sellers of ABCP may choose to ignore the fine print and sign on the dotted line to be done with the situation altogether. However, as a consultant I can only urge sellers and potential buyers not to make the same mistake twice. While it would be convenient to accept the proposal with JP Morgan’s valuations, investors will be doing themselves a favour by seeking the expertise and taking a second opinion to ensure they are getting a fair deal.

In order for an announcement to be made with terms and conditions, Crawford’s Committee must finalize negotiations with foreign banks on the conversion of mark to market triggers to spread loss triggers on the CDOs and secure the liquidity required from the big banks to fund a margin facility for potential collateral calls. With this recent announcement, I am confident that they are close to finalizing these arrangements and we will be hearing about the proposal soon. I continue to hope that some funds will be available as loans to the smaller investors to give them temporary relief as we wait for the conclusion of the restructure scheduled for March 2008, but I think investors should prepare for the fact that this may not be made available.

There has also been some great news for the unfrozen ABCP, which represents about $87 billion in Canada. Deutsche Bank launched a new conduit, Okanagan Funding Trust, the first Canadian ABCP conduit to be rated by S&P. RBC Capital Markets announced that they have added a Moody’s rating to all three of their conduits. The Canadian Pension Plan Investment Board (CPPIB) has purchased $6 billion of bank ABCP. This demonstrates the resilience of the ABCP market and a very positive sign that it will survive through the turmoil. Altogether, this has been a great week for the securitization industry.

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