Monday, December 3, 2007

What can we expect with the Montreal Accord on December 14?

By Daryl Ching
Clarity Financial Strategy

It should be apparent that many questions still need to be answered when assessing the outcome of the ABCP restructure, and all these questions have implications on recovery value of the investments. It appears in a recent report issued by Purdy Crawford's Committee that progress is being made and I applaud their efforts on this difficult restructure. Having said that, we still seem to be missing the principles of something our nation is very proud of – capitalism and an open economy. Whether an investor holds $50,000 or $1 billion of ABCP, it's counterintuitive to say that they are not allowed to sell their assets. What the Pan Canadian Committee is missing is a second option for investors to sell their assets immediately in the event they cannot wait until March 2008 or possibly longer. In order for this to happen, the Committee must release the information in the Data Room managed by Ernst & Young to the public to allow meaningful secondary bids. As the assets continue to be of strong credit quality, there is certainly demand from various hedge funds and fixed income portfolio managers to buy the assets. However, they cannot do this without information. By providing data, secondary investors will have the tools to conduct prudent analysis for their investment decisions and offer bids higher than 50 or 60 cents to the dollar. With multiple bids, this will enhance the pricing on these investments and at the end of the day, investors have a choice to sell their assets or not.

In various press releases, I have seen potential buyers labeled as “debt vultures” and making an effort to “exploit those in need of liquidity”. I have a hard time trying to understand how secondary trading in ABCP is any different than any other market. Let’s take an example where Mutual Fund Corp., a conservative fund manager is holding XYZ Corp. that is suddenly downgraded below investment grade on negative earnings. Due to Mutual Fund Corp.’s conservative investment guidelines, they are forced to sell XYZ Corp. The likely buyers will be other funds that take greater risks, in hopes of high reward. It is likely that Mutual Fund Corp. will sell XYZ Corp. at a discount from its original purchase price. However, Mutual Fund Corp. is likely thankful of an open market system and the fact that they were able to dispose of their assets.

Despite strong affirmed ratings by DBRS, the ABCP can clearly be classified as distressed assets. There is no liquidity in the ABCP market and there are so many uncertainties about the outcome of the restructure. It is only fair that potential buyers of ABCP need to be compensated for the lack of information available and the uncertainties that exist. It is for this very reason that potential buyers ask for a purchase price at a discount to par. A trade will take place between a seller who cannot wait for the restructure to complete or does not have the risk appetite for the uncertainties ahead in the restructure and a buyer who can wait and does have the appetite. However, we should all be glad that there is an investor base willing to buy the distressed assets when an efficient ABCP market does not exist.

Despite the lack of information, I remain confident that the Pan Canadian Committee will be successful in the restructure. Whether this takes place in March 2008 or later remains to be seen. The restructure will result in the ABCP being converted to long-term notes to match the maturities of the assets. When this happens, I expect there will be much more information and help for market participants to assess the value of the assets. I anticipate that we will find that the trusts are of varying quality, and some will price closer to par than others. However, I am also hopeful and optimistic that for those investors who just cannot wait, there an opportunity for them to sell their ABCP well before March 2008 either privately or through the Perimeter Financial trading platform.

As an individual who has invested over six years in this industry, I feel a personal responsibility to facilitate a fair resolution for all parties involved. At the very least, fair to me means full transparency and full dissemination of information that is available to all parties involved to level the playing field so that everyone can make informed decisions.

Daryl Ching
Clarity Financial Strategy

1 comment:

Ross said...

With respect to "debt vultures", I have to say it's all a question of perception management. What's the difference between a debt vulture and a business interest trying to help both sellers that need money as well as helping themselves?

It's all a question of perception.