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.

Monday, April 7, 2008

Pulling A Head out of the Sand

By Ross Hendin, Hendin Consultants

There have been a number of posts on the ABCP Facebook forum, and questions being asked in he public domain about the few hundred note-holders who purchased ABCP through Credential, a credit-union in the West who have done an outstanding job at keeping their heads in the sand until now.

Essentially, Credential is a "national wealth management provider founded by the Canadian credit union system". They have a few contact numbers on their website but, from what I have been told by Murray Candlish and have seen from the press, they are not returning ABCP client calls, and are trying as hard as possible to do as little as they can.

One of their more high-profile clients, who will not be named on this blog specifically, was told by his Credential IA when he was making the investment that "if this investment fails, the whole financial system in Canada would probably fail." They have also not yet provided their noteholders with any information or support to help their clients through understanding the restructure or the voting process (this client requested both in writing and over the phone from them a few weeks ago). The following day, this client received an email that Credential was "monitoring the situation", and the day after that, when this client got in touch with their head office to request a list and contact details of Credential's Board, Credential's staff told him to get in touch with his IA for that - which wasn't possible for him because Credential actually blocked his email address within 2 days.

While the horrible behavior and optics of this situation are worthy of their own blog on what NOT to do with customers / crisis in any industry, I want to use this space to articulate a few finer points on what both the Credential clients and Credential themselves should consider, from both a Public Relations and general strategic perspective:

Credential clients, keep focusing on telling your stories and make sure you have a very clear ask for Credential to respond to. Asking questions in public may be the only way to get them heard by the seniors at the company. What is currently being considered in the relief plan? What, if anything, can Credential do today to better arm their clients before the vote? Why is the Board so difficult to find? Why would a company block a client's email address - what questions can they not afford to have asked?

Credential - at this point, there is nothing to gain either legally or optically from blocking clients' email addresses. What you should be concerned about now is trying to rebuild your reputation and it starts by doing the best job you can for your clients. After the dust settles in this mess, they are the ones that will have to forgive you. It does not matter if your clients are not internet users, or they will be irate when they find out that their money is frozen and there is a chance it will vanish... what matters is how to tell them, how you help them, and where you go from here. Your business, and the allience your business is in, is totally built on trust and the understanding that the Credit Unions and Co-ops are NOT Bay Street players, but are real people working hand-in-hand with the communities because you are all from the same place and on the same page. As this story starts to spread through those communities, that trust will vanish and will take a very long time (if ever) to rebuild. If your clients see you as worse than the people that wear suits to work in Toronto, your business could disappear. There are a number of case studies (Tylonol is one I refer to often) that show how putting your clients above all else keeps trust and is critical to rebuilding when the dust settles. I strongly urge you to call communications specialists and get your clients armed, informed and trusting you again as quickly as possible.

Friday, April 4, 2008

Corporate Noteholders: Investing In Becoming Critical?

By: Ross Hendin, Hendin Consultants

In yesterday's Financial Post article, Mid-Sized Investors Plotting To Unite, John Greenwood has told the ABCP market and all its spectators that the minority noteholders (those that are corporations holding ABCP, rather than the retail noteholders that are individuals) are considering posturing for a bailout themselves. Their wanting a bailout is perfectly natural, as said to John by a CFO of another mining company:

"You do something for one group and not for everyone else... I don't see how they can offer this deal [to retail investors] but not to the others."

Where corporations have understood that because they are a minority in terms of the number of votes they have, and the amount of paper they hold relative to the market size, simply threatening to vote "no" is not compelling enough to push anyone to buy their paper and risk a loss of their own. But does this mean that corporations are stuck going along for the ride? Not necessarily. The same thing that limits sympathy for the corporate noteholders also empowers them in a way that the retail clients are not able to think or move: their resources. Corporations holding ABCP have a relatively less severe reality to retail noteholders, but they also have resources to take any actions or devise any strategies they want, which makes this group potentially critical on a very different level.

The corporate noteholders have deep pockets, and while some corporate noteholders feel that sending lawyers after the banks is just throwing good money after bad, many others realize that their are a number of ways they can try to collect through different legal and public relations strategies. These companies have now seen the retail investors organize and become vocal, and have taken notes on what they did right, and what can be improved. For example, should the corporations start a Facebook group? Probably not, but they may have learned that one company who emerges as overly vocal and calling to arms may find others easily. They may also have learned that the tragic stories of the retail noteholders are far more compelling than the woes of a company that remains cash-flow positive, but that does not in any way stop them from telling the market about potential legal remedies should they vote "no", or about critical insights they have found making a "yes" the right option.

As long as a few corporations see organizing and building a strong strategy for themselves as a smart way to hedge their bets, I will not dismiss them as an irrelevant minority. I have had enough conversations with counsel over the last number of months to know that there are a number of different strategies / concepts out there that are just waiting to be explored, and after reading this article, it looks like there are more than a few companies ready to explore them.

Wednesday, April 2, 2008

Clarity provides comments on ABCP restructure plan

By: Daryl Ching, Clarity Financial Strategy

It has been quite some time since our last post. The analysis of the restructure plan has been far more difficult than we ever imagined, but we have reached a couple conclusions that I would like to share with readers of this blog.

It has become apparent to us, without much surprise that investors generally find the restructure plan completely incomprehensible. The truth is that there is absolutely no way a 385 page document and a two-hour presentation is nearly enough to help people understand the complex mechanics of ABCP. Even being in the industry, it took me months to wrap my head around the structures, and I have a finance background.

By now, most of you know that the Class A Notes for the CDO tranche are only being assigned a AA-rating from DBRS. Other rating agencies have declined to rate the structure. We believe this may either be because they did not deem the structure to be AA or have withdrawn ratings on leveraged super senior transactions altogether. We began our analysis by reviewing the CDO methodology used by DBRS and running the models that we usually would. The margin facility combined with underlying collateral to support margin calls is well over 100% of the leveraged super senior notes. The spread-loss triggers, which are benchmarks, that if crossed will cause margin calls are set a level far more remote than previous structures we have seen. So it is a better transaction than what we have seen in the past. Does this make us AA confident about the new notes?

While financial models are a great tool to assess value and risk, it is important to note that they have proven to be wrong. They generally look at credit cycles over a historic period and map out worst case scenarios with a certain confidence interval. However, we have seen things happen over the last couple months that were unthinkable a year ago. No financial model predicted:

  • The global liquidity crunch we are seeing today
  • AAA rated monocline credit insurers like Ambac asking for a bailout and losing 90% of its market share
  • Hundreds of billions of write downs from the world’s largest banks that were perceived to be conservative
  • The collapse of Bear Stearns and a potential sale at $250MM, once one of the world’s largest financial institutions
  • Citigroup, once the world’s largest bank losing half its market share

For these reasons, individuals, including myself have lost faith in quantitative models to predict risk. Even if the margin facility was $20 billion and the spread-loss triggers were set at 600 points, I’m not sure anyone would give a AAA stamp. Unfortunately, LSS CDOs have a high correlation with credit volatility and take on a significant amount of market risk. We may never see a AAA-rating again on this type of product again. It is important to keep in mind that you can never create a structure that has a 100% certainty of recovery. Unfortunately, you will always have “tail risk” or unlikely events that fall into the 1% bucket and they have happened.

So are the restructured notes solid? We think that the financial models have merit and need to be understood but must be supplemented with common sense. The credit protection provided for the restructured notes are certainly higher than we have seen in previous transactions and is likely the best deal we will be able to get based on negotiations from the Crawford Committee. Some economists believe we have seen the worst and are at the trough of the credit cycle. The credit markets have actually improved significantly in the last couple weeks. We heard news yesterday that UBS wrote down another $19 billion due to the mortgage fallout, but were able to raise $15 billion in fresh capital. Analysts have indicated that the worst might be over and investors have not given up on the large banks. The news was viewed positively as the Dow Jones continued to surge 3% despite this news. Credit spreads improved yesterday. So there may be light at the end of this tunnel and it may be within reach.

However, if the markets continue to decline the way they have from August to March, all bets are off. Two or three more Bear Stearns type incidents can rattle the market to the point where the new triggers will get breached and the margin facility will get fully drawn.

In short, we need to understand the financial models and take a view from macroeconomic perspective. Your views on the restructure plan will also depend on whether we will experience a deep recession and to what extent the credit markets will continue to get rattled with bad news. While we may not be AA confident, we still believe the restructured notes are sound and will return full value at maturity.

Saturday, March 22, 2008

Not just a simple yes or no

By: Daryl Ching, Clarity Financial Strategy

The 385-page restructure plan, titled Information Statement is now available on E&Y’s website at Over the next few weeks, participants will be scrambling to digest the document and make a decision as to whether this is an agreement that makes sense for them or not.

There are many things that need to be considered in the voting process. For every note holder, every situation is unique, and they will be motivated by different factors, based on their financial situation, appetite for a law suit, and optimism that there will be liquidity in the near future for the restructured notes.

Clarity Financial Strategy has commenced its review of the document. We anticipate a full review will require several days, and we will reserve any comment, until we have reviewed the document in its entirety and have formed an opinion. We hope to provide information in the following form:

First, we will look at the scenario if the majority vote is no and the restructure is unsuccessful. We will provide an analysis as to what we expect the recovery value to be in a forced liquidation of the assets. We will not be in a position to determine the timing and the probability of a success of a law suit. However, we anticipate that litigation will take years to resolve with a great uncertainty on the outcome. For those who have the financial means to wait out a resolution, this may be their best option.

Second, we will look at the several scenarios if the majority vote is yes and the restructure is successful. At that point, the investor will have several options:

1. Sell the restructured notes immediately. We will provide an opinion on the range on pricing that we believe the notes will sell at. It is important to note that our assumptions will vary with each trust. Current note holders need to obtain a full understanding of the assets they hold: Traditional Assets, MAV (allocation of Class A-1, Class A-2, B and C Notes), and Ineligible Assets, as the anticipated recovery will vary for each class. For Canaccord clients, we will also be looking for the full details on the “Relief Program” that was recently announced by Canaccord.

2. Hold the restructured notes for an interim period and sell when the credit markets improve. While we are unable to predict the future of the markets, we will provide an opinion on the pricing of the notes over time. It will be important for note holders to consider the different forms of liquidity that will be available. We will be looking for updates from the Crawford Committee on any developments in liquidity, whether it is through buyers of the restructured notes or the “moral suasion” they will be applying on institutions to provide lending backed by new notes. We will also be looking to Canaccord’s Relief Program to determine if it provides any support during the interim.

3. Hold the restructured notes to maturity. DBRS has provided ratings on the new notes. Clarity Financial Strategy will review DBRS’s ratings, methodologies and JP Morgan’s valuations. We will be providing an opinion on the recovery value of all the assets in the various classes if they are held to maturity. This analysis will be important also for those who plan to sell the restructured as well, as high recovery values will be important for potential buyers.

Clarity Financial Strategy continues to remain cautiously optimistic about the success of the Restructure Plan. As you can all see, this is not a simple yes or no vote and many things need to be considered. We will be providing insights on the plan to help our clients understand all the angles and make an informed decision. At this point in time, we have not come to a decision yet and are still uncertain about whether we support the proposal or not. We will be working around the clock to come to a conclusion and look forward to providing the insights that will be required for our clients to make decisions.

In the interim, we will be reserving any comments on the restructure plan, and may not be available to provide further insights on our blog, until we have reached a conclusion. I only hope that all note holders will review the plan carefully and consider all variables before the vote in April.

Thursday, March 20, 2008

Expert Opinion on CCAA and implications

We have received numerous questions from investors about the difference between the Trust Indenture and CCAA. What are the implications of the Crawford Committee converting the trusts to corporations and filing for court protection? We reached out to seek an expert opinion on this topic. Jerrard Gaertner is accountant who specializes in bankruptcy and was happy to offer his advice. Clarity Financial Strategy is pleased to provide an opinion from an expert in this area.

By: Jerrard Gaertner CA, CIRP, CIA, CFI, Soberman LLP

Trust Indenture vs. CCAA

The move from a trust indenture (which is essentially a borrowing and security contract) to the Companies’ Creditors Arrangement Act (“CCAA” - which is a legal framework within which stakeholders and the Court re-organize an entity) entails a substantial shift in “power” away from management and toward the creditors and noteholders as a whole. However, the exercise of this power is now constrained by the Court, procedures, timelines and protocols established within the CCAA.

In addition, the shift entails some loss of individual noteholder’s automony in favour of the group, since it is now the noteholders en masse making choices. Those that disagree, if they are a small enough minority, are compelled to go along.

Here are some of the finer points:

If a noteholder votes “no”, but the plan of re-organization is nevertheless approved by the requisite majorities and the Court, that noteholder is still bound by its terms.

If the plan of re-organization is approved, any right to sue will at best be highly restricted, at worst it will disappear.

Suing for the recovery of money lost on the basis of a commercial debt obligation will probably not be possible, because the plan of re-organization entails a permanent stay of proceedings and a Court ordered compromise of debt.
However, with the permission of the Court, it is sometimes possible to sue if the basis for the action is fraud or there is some overriding social policy objective at play.
The Court will be loath to endanger the re-organization by permitting lawsuits, so the plaintiff must have VERY good reasons to sue (not just lost money).
Moreover, the Court may determine that even if the lawsuit is eventually won, the award simply becomes another pro-rata claim in the CCAA proceeding and will never be paid in full.

If a noteholder votes “yes”, but the plan is not approved, all bets are off. In the most likely scenario, another plan would be proposed; alternatively, the trusts can file for bankruptcy protection.

What would happen if the corporations were to go into bankruptcy?

The most fundamental difference between bankruptcy and a CCAA filing is one of control. Bankruptcy entails the appointment of a Trustee and by operation of law, all assets of the Debtor corporation vest in him (or her) immediately. From that moment onward, neither the shareholders nor Board of Directors have any real say in what happens to the company’s assets, or who gets what.

By contract, when a plan of re-organization is filed under the Companies’ Creditors Arrangement Act (CCAA), there is no vesting of assets and only some loss of control on the part of the shareholders and Board. A CCAA filing is designed to give management time to reorganize the company, not an outside Trustee the opportunity to liquidate it.

A CCAA proceeding is a complex, multilateral process that is much less prescribed than a bankruptcy. Management, senior/secured creditors, statutory creditors (GST, source deductions), unions and employees, landlords, critical suppliers, the Court and its monitor (usually a Trustee) and even shareholders participate in negotiations aimed at creating a viable company from the existing insolvent one.

Under the CCAA:

management proposes the classification and prioritization of creditors (within limits) for voting purposes and in respect of proposed recovery by creditor class;
the court approves or rejects management’s classification;
if approved, creditors vote on the reorganization package; and
if accepted by the requisite majority (by class), the plan of reorganization essentially morphs into a Court Order by which ALL creditors are bound (whether having voted “yes” or not).

So what about the Noteholders?

On balance, my take is that they are far better off with the CCAA filing than with a bankruptcy.

The CCAA provides far more procedural and financial flexibility than does a bankruptcy.
A CCAA proceeding is court-driven (meaning the parties almost always have an opportunity to present their point of view) whereas in bankruptcy, the Trustee and inspectors have considerable power to deal with assets on their own.
With CCAA, the risk of a bargain basement sale of assets is arguably lower than in a pure liquidation.

Jerrard Gaertner CA, CIRP, CIA, CFI
Trustee in bankruptcy

Wednesday, March 19, 2008

Insights on E&Y Monitor's Report

By: John Sokic, Daryl Ching

As most of you know, we will be providing our corporate and retail clients a summary and analysis of the Restructure Plan. While we have not received the finalized documents, we did review the Monitor's Report from Ernst & Young available on their website at We would like to provide our readers with the following insights, that we found interesting:

Section 17

  • $32B total among 189 deals
  • 97 Traditional deals, totaling $7.5B
  • 21 deals that are either cash or unlevered CDOs, at $4.5B
  • 71 Levered Super Senior (“LSS”) deals, at $17.6B
  • Cash in all affected conduits from return of principal includes $2.4B

Section 46
Virtual Data room containing information on the underlying assets will not be available until all agreements are finalized. The question remains as to when this will be.

Section 48
Aggregate Cash Position for all affected conduits as at January 31, 2008: $3.2B. Some of this cash may be used to cover the shortfall in the margin facility, if it is not fully funded. We understand there is a commitment for 98.5% of the $14 billion required amount at this time.

Sections 51-53
There is a planned sale of approximately $1.5 B of Traditional Assets for potentially as much as their par value. This would benefit series specific noteholders of Traditional Assets.

Section 56
Conduit Sponsors will receive 30 bps for administration services accrued from August 2007 through to the end of the restructuring phase.

Section 62 d)
Fee Cap on Conduit Sponsors seen as positive by E&Y. It allows surplus funds to be available to be used for margin funding requirements or interest payments to noteholders. These comments imply that margin funding top-up is the highest priority in terms of cash direction for the new, restructured notes. Cash on hand, interest and principal received going forward could be diverted for this purpose, potentially delaying repayments to noteholders.

Section 79 e)
There is a statement here that implies a 9 year expected maturity for the restructured notes.

Section 83
DBRS Rating on Class A notes may end up at single "A".

Section 87
E&Y says swap triggers are not finalized (among other arrangements). This introduces speculation on where the triggers will end up and whether there are any issues with counterparties in the current volatile market environment.

Section 90
74% of LSS deals have hit triggers, with another 20% within 10% of doing so as well. This confirms our suspicions that a fire sale today would lead to extremely low recoveries.

Section 91
E&Y believes that investors would experience a very low recovery, should investors choose not to approve the restructure. They also say that a legal battle, as an alternative avenue for investors, would be very costly and time consuming.

Section 97
E&Y says the A-1 notes in each MAV are the focus of the restructuring in the sense that they are designed with subordinate tranches to achieve a high rating and ultimate liquidity in the secondary market, post restructuring.

Section 98
MAV1 investors need to be AA (low) and/or need to have their amount of MFF commitment in cash or cash equivalents.

Monday, March 17, 2008

Everyone's vote matters - One step closer to the finish line

By: Daryl Ching, Clarity Financial Strategy

I would characterize this as the longest 11th hour ever. It appears the Crawford Committee has filed an application in the Ontario Superior Court of Justice under CCAA to call a meeting of ABCP noteholders to approve the Committee's Plan. Assuming that the court approves this, a Restructure Plan will be mailed out to all noteholders and they will be given approximately 30 days to vote.

The most interesting aspect of this press release is that under CCAA provisions, the Plan must be approved by a majority of noteholders (regardless of the size of their holdings), as well as by noteholders representing at least 66 2/3% of the total aggregate principal amount. This means that the large institutional investors can no longer approve the Restructure Plan in accordance to the trust indenture, and everyone's vote will count. It is now extremely important for all noteholders to fully understand the implications of the Restructure Plan in order to make an informed decisions.

It is also interesting to see that the self-funded margin facility has increased from $8 billion to $8.5 billion. This means that either the Caisse has stepped up with more cash for the margin facility or the Committee was successful in bringing more investors to the table to self-fund the margin facility.

The Committee has reached more than 98.5% of the required margin funding facility, which suggests a shortfall of $210MM. The Globe and Mail had indicated that one of the Canadian banks had not given final approval for their commitment. Although the Committee has not disclosed the bank, we have reason to believe that it is TD Bank, due to the small commitment size. TD Bank had indicated that they still might support the margin facility, despite their lack of involvement in the non-bank ABCP market.

Clarity Financial Strategy remains cautiously optmistic about a successful restructure

By: Daryl Ching, Clarity Financial Strategy

The Crawford Committee is expected to appear in front of the Superior Court of Ontario this afternoon to convert the ABCP trusts to corporations and apply for bankruptcy protection. This is no surprise and a move that has been contemplated for some time. The reason for this is because, since February 22, the Crawford Committee has been unsuccessful convincing all the parties at the table to agree to an extension in the standstill period. If the restructure is approved, there still remains another month and a half, in which investors need to vote for the proposal and the restructure gets completed. The Committee requires assurance that there is some form of bankruptcy protection so that no party can cause an event of default in the interim period.

According to the Globe and Mail, one Canadian bank has been delaying its formal approval. As a result, a Restructure Plan could not be released on Friday. It is our view the Restructure Plan will get still get completed. Unfortunately, there is no telling of when this will happen. The repercussion of a the committee disbanding is an event of default and a fire sale. This would be a disastrous scenario and nobody wants to see this happen, as there is too much at stake. Again, as I have mentioned before, the big game of chicken continues as banks hope that others will step up, so they don’t have to. Perhaps it might be time to call up on JP Morgan to step in for the missing piece of the margin facility so that the Committee can finally ink a deal and we can start moving on with a vote.

Friday, March 14, 2008

ANNOUNCEMENT - Canaccord Capital Hires Clarity Financial Strategy To Assist Their Clients

TORONTO -- Clarity Financial Strategy (“CFS”) is pleased to announce that Canaccord Capital Corp. (“Canaccord”) has offered Clarity Financial Strategy the resources necessary to provide their clients with an independent and objective analysis of the Pan-Canadian Committee’s Restructure Plan. The Plan is expected to be released on or before March 14, 2008.

Increasingly, noteholders, dealers and potential purchasers are looking to better understand the products and the implications of the restructure currently underway. Canaccord’s providing the CFS services to their clients help the clients to make an informed decision on whether or not to support the Pan-Canadian Committee’s Restructure Plan.

While many noteholders have turned to their dealers that sold them their investments for a better understanding of the product, many noteholders are seeing the value of turning to specialists who were directly involved in structuring the assets. Canaccord’s decision to bring in experts to assist their clients in understanding the proposal is a clear indication that they believe independent analysis of the Plan is a critical tool in order to make an informed decision.

DARYL CHING, Managing Partner: "Canaccord’s clients have been doing an amazing job of getting their voices heard by both Canaccord, and the Pan-Canadian Committee. Canaccord’s decision to provide our services to them will help give their clients a better understanding of what is happening with their notes, what the Restructure means, and what the implications are of signing on. While we have been providing information to the public by means of our blog, news releases, white papers and television appearances, this arrangement provides the resources for us to help noteholders in a much more meaningful way.”

DARYL CHING: “We celebrate our ability to present objective independent opinions to the market, our clients and to the public. A critical part of our agreement is that both Canaccord and CFS are committed to allowing us to make a completely independent and objective analysis of the Restructure Plan. To Canaccord’s credit, Canaccord has clearly expressed to us that we are an independent voice in this, and they respect our need to remain autonomous and in communication with the public, media, and noteholders directly. We are pleased they see the value in our expertise in structured finance and our ability to provide an opinion on the implications of the Restructure Plan and valuation of the restructured notes.

JOHN SOKIC, Partner: "We are looking forward to providing detailed analysis of the Restructure to the Canaccord clients, and believe that our completely objective opinion of the Restructure will benefit them enormously. As we are very familiar with the assets underlying the ABCP, we are well positioned to provide a credible opinion."

Clarity Financial Strategy Inc. is a Toronto-based consulting firm focused on providing insight and recommendations on the ABCP situation. Managing Partner Daryl Ching is particularly outspoken in defence of noteholders in the ABCP restructure. For further enquiries please contact CFS Managing Director DARYL CHING (416) 505 7467 ###

Thursday, March 13, 2008

Are we getting close to the finish line?

By: Daryl Ching, Clarity Financial Strategy

Jim Middlemiss of the Financial Post published an article that indicates that the ABCP restructure is nearing the end. Papers will be filed in an Ontario court this week, seeking a judge’s approval to implement the restructure package. “Everyone is on board” and lawyers are expected to appear before a judge tomorrow.

This is all great news and it appears the Committee might meet the March 14 deadline tomorrow, disseminating the Restructure Plan to investors. What this tells me is that the Committee has secured the $14 billion margin facility, which appears to have been the most difficult hurdle to date.

It appears the traditional assets, which are perceived to be of the highest quality will be issued as AAA and AA notes. The press release has remained silent on the synthetic CDO tranche, which leads me to believe they may not come out AAA. The spread loss triggers will be reset, easing financial pressures. As credit markets have deteriorated far beyond our wildest imaginations since August of last year, resetting the trigger today to a level that has a remote chance of breaching makes sense. We will be providing an opinion to our clients on the likelihood of a draw on the margin facility.

In today’s credit environment, it must have been extremely difficult to keep all the banks at the table, and I applaud Mr. Crawford and his Committee for getting this far. However, investors need to be aware of a couple possibilities in light of the current situation:

  • I expect the standby fee for the margin facility may rise from 160 bps in light of current market conditions. This may ultimately mean that less interest will be paid to noteholders.
  • The mark-to-market for synthetic CDOs is expected to be low. This means that unsophisticated buyers of the restructured notes will be offering very low bids.

The expected losses on the synthetic CDO tranche are a combination of two factors:

  • What is the likelihood of a breach of the spread-loss trigger and a margin call?
  • Is $14 billion of margin sufficient? What is the chance that the full $14 billion will be drawn and we will be hitting a fire sale scenario?

While I know that most investors never intended to be ABCP / CDO experts, it is extremely crucial to fully understand the mechanics of the restructure. Whether your intention is to sell the notes in the secondary market, seek lending from a financial institution, wait for the credit markets to calm before selling, or even pursue a settlement, having the ability to explain why you think the assets will recover par at maturity will only put you in a favourable position at the negotiation table.

We urge investors to seek the appropriate advice on what we believe will be a Restructure Plan that will be comprehensive and have many moving parts.

Wednesday, March 12, 2008

How will the banks handle the settling dust?

By: Ross Hendin, Hendin Consultants

From the perspective of a communications strategist, this week is certainly chalked full of anticipation as the Restructure Plan is expected to be disseminated this Friday. The phones seem to have quieted a bit, the articles in the media seemed to have softened, and even the irate and very vocal Facebook group seems to be simmering down with a touch of resentment. Everyone sits with baited breath while we wait for the Pan Canadian Committee to release what is sure to be a very technical restructure proposal few of us will understand - it brings the market one big step closer to assessing the damage and finding some relief money.

The noteholders in general have been fairly quiet though most of the last many months - waiting patiently to see what the Restructure Plan is going to look like, what it will mean to their notes and ultimately their corporate holdings. The now famous retail noteholders have also shown they will stop at nothing to be treated fairly and have somebody buy back their notes. They are going to be a group to watch in coming weeks I'm sure.

But what this is leaving, across the board, is a very bad taste in a lot of customers’ mouths. When the proposal comes out in a few days, and noteholders vote on it in a few weeks, some will just make adjustments to their books and go about their business, but others will want compensation - or at least an apology - for their troubles.

From a legal perspective, the situation is very much systemic. There is no one group or person to blame here because so many groups were involved and interacted to make the CP machine function so well for so many years. From a publicity perspective however, noteholders are going to turn to the companies that sold them the paper the way cell phone users expect to return their Nokia cell phones to Telus or Rogers. Many noteholders have done or tried this already.

And for a number of reasons, most of those institutions have not bought back their product. To put it in consumer-product terms, the resellers "have not stood behind what they have sold". So, when the dust settles on this Restructure Plan, and the notes are able to trade on a secondary market, it will raise a question about what the banks are willing to do to put a smile on their client's faces. Will they buy notes back with interest, buy them back at all, facilitate trades, etc? And what will they do about the lost faith between their clients and themselves? A downside of our very small Financial community is that everyone's involved in this mess, so a client would be going from a devil they know to a devil they don't...

I feel strongly that since the end is now in sight, the banks need to seriously consider how they are going to posture themselves with respect to the notes, and they need to decide clearly just how important customer satisfaction is to them. Perhaps with the wave of write-downs and bad press that banks have had in recent months, some more bad visibility from annoyed client's won't matter. Perhaps, however, the banks may still feel that trying to help their clients as much as possible, and putting their best PR foot forward makes sense. I haven't gotten any sense at all that the banks are doing anything publicly to help burnish their image on this matter, and that's disappointing to me.

The unfortunate reality is that a lot of businesses and lives hang in that balance.

Monday, March 10, 2008

Why should I care about a successful restructure plan?

By: Daryl Ching, Clarity Financial Strategy

As most of you know, I have been in touch with numerous ABCP noteholders – retail and corporate. Some have engaged us to provide a full analysis of the Restructure Plan, which includes review of the valuation of the restructured notes, fundamental credit analysis, analysis of the terms and conditions, and the implications of signing on to the proposal. A question I have been asked by several people is, “If I can’t hold the assets for 7-10 years, why should I care about a successful restructure plan?”

Most investors have realized that a successful restructure plan does not mean that they will be receiving all their money back at the end of April. The ABCP will be restructured to longer term notes to match the maturity of the assets, and it is the hope through our analysis that these assets will recover par at maturity. There is no promise that noteholders will be able to sell their notes and at what price. Mr. Crawford has indicated that providing liquidity to those in need will be a key initiative from the Committee. This may be achieved through a secondary market, where buyers will purchase the notes or loans from a financial institution backed by ABCP. We need to hold the Committee accountable for this and ensure that this remains a top priority for those investors who do not have the capacity to hold on to the notes.

However, whether your intention is to sell the notes in the secondary market, obtain a loan or even sue for damages, I have to conclude that a chance of full recovery of your principal is best if the restructure is successful. As I have mentioned before, an unsuccessful restructure and a fire sale, could result in zero recovery for a large component of the assets. If a successful restructure is completed appropriately, and if the opinion is given by experts in the market that there is a reasonable expectation of full recovery over a certain term, I have to think that larger institutions are much more likely to make concessions and take on the exposure.

I understand a number of you are extremely upset and feel that the larger institutions should step up and take some responsibility for what has happened – and they should. There is a way you can point a finger at dozens of parties who should take a share of the blame for this financial crisis, they all need to take some responsibility. However, if a restructure does not complete and the perceived value of these notes becomes zero, I assure you that no one will be stepping up and we can all brace ourselves for years of litigation and finger pointing before anything gets resolved.

In my opinion it is important for all noteholders to understand the Restructure Plan and be able to make an informed decision as to whether to sign on or not.

Tuesday, March 4, 2008

BMO and Scotia will still support non-bank ABCP market

By: Daryl Ching, Clarity Financial Strategy

Nicole Mordant from Reuters published an article reiterating support from BMO and Scotiabank for the margin facility. However, the banks will not reveal the amount they have committed. "We feel that we are part of the overall Canadian financial system, there is an issue out there and we have some exposure... and therefore we cannot just sit on the side and not try to bring a solution to that issue," said Yvan Bourdeau, chief executive of BMO Capital Markets.

In a surprise move, BMO is appears to be letting their own CDO conduits proceed into a fire sale, but is still continuing to support the non-bank ABCP conduits. There are several potential reasons as to why they might have made this decision:

  • BMO does not want the responsibility of being the bank that reneges on its original commitment and causes an unwind of the $33 billion non-bank ABCP market
  • The legal immunity provided by the release investors are being asked to sign is attractive to them
  • Further pressure may have been applied to them by Bank of Canada
  • They wish to support the broader ABCP market, which will have an impact on the overall Canadian economy

Whatever the reason is, we all need to breathe a sigh of relief. This is certainly fantastic news, as we may actually see a Restructure Plan from the Crawford Committee on March 14. With tensions high and patience running out, the Crawford Committee is in a position where they cannot miss another deadline or investors will begin to seek action. While this is a good sign, we cannot rest easy until the terms and conditions are finalized and the commitments are secure from the various financial institutions. Once the Restructure Plan is completed, investors should ensure that they fully understand the terms and conditions, seek a second opinion on the valuation from JP Morgan and understand all the implications of their choices.

I applaud the Committee on this fantastic piece of news and urge them to ink the deal while they still have the momentum and support of the Canadian banks and the foreign banks. All ABCP investors will then be able to take comfort that their investments will not lose all their value.

Once the Restructure Plan is completed, the next important question for the Crawford Committee will be to understand what measures are being taken to facilitate liquidity, whether it is through a secondary market or through lending against the notes. Potential sellers should arm themselves with a solid understanding of the value of the assets before they approach the negotiation table and buyers will need to be educated abroad. The majority of small corporations and private investors are not in a position to hold the assets for 7 to 10 years. There has been significant headline risk with these assets relating to “subprime” and “derivatives”. Despite the AAA rating, I anticipate that these notes will still sell at a significant discount to par, but the gap can certainly be closed with greater transparency and education in the marketplace.

ABCP Update - Business News Network - 3:10 PM EST

By: Daryl Ching, Clarity Financial Strategy

You can view my BNN interview by clicking here.

Clarity Financial Strategy still cautiously optimistic about successful restructure of ABCP

By: Daryl Ching, Clarity Financial Strategy

The more we read about the ABCP situation, the more signs we are receiving that this restructure may fall apart. As we had correctly pointed out on our blog on March 1, the Standstill Period is now being extended day to day, as the foreign banks do not wish to commit themselves any longer than that due to credit volatility. Purdy Crawford confirmed in an email to Brian Hunter’s Facebook group that investors should expect to sell their notes “at a significant discount to par.” A report from RBC's Mr. Andre-Philippe Hardy speculated that one of the foreign banks "has apparently become more nervous" and is no longer supporting the restructuring. If that is the case, "it could derail the restructuring," he said in a note last week. We have heard that BMO may be walking away from the table, in light of their current situation.

So where does that leave us? Is this Committee going to crumble? Are we going to see $33 billion of assets in fire sale? At Clarity Financial Strategy, we are still cautiously optimistic about a successful restructure, but before we go into our reasons, I want to reiterate the importance of the completion of this restructure.

An Event of Default and fire sale is an absolute disastrous scenario for all parties, maybe with the exception of lawyers. If this happens in today’s credit environment, we believe recovery value may be as low as zero for the synthetic CDOs, and we will all find ourselves in ABCP litigation for the next ten years. While I agree with Mr. Crawford that the restructured notes are likely to sell at a significant discount to par, I also believe that with a proper restructure with a margin facility, noteholders who hold the assets to maturity will receive close to par at maturity (with little interest).

So why are we still so optimistic about the restructuring? In December 2007, Mr. Crawford indicated that we had $12 billion of commitment for the margin facility, with a shortfall of $2 billion to be covered by the Canadian banks. In January 2008, Mr. Crawford mentioned that we had a commitment for 98% of the required amount, which would indicate about $13.72 billion. Now, we don’t know what the right number is, but let’s assume that we have $12 billion committed, without the participation of the Canadian banks. If Mr. Hardy is right and we may see one of the foreign banks walk away from the table, then let’s remove another billion and that leaves us with $11 billion committed.

As I have mentioned in previous blogs, nobody wants to see a meltdown. There is too much at stake, especially when considering that a fire sale could yield zero recovery. There are still a few possible outcomes to cover the required amount. Mr. Louis Vachon of National Bank has indicated that the Committee has alternative solutions, but would not go into what they were. Let’s do some thinking for ourselves: On a conference call in December, we learned that JP Morgan would top up the margin facility in the event that we had a shortfall if the Canadian banks did not participate. People have suggested that the credit market is much more volatile now and they may be reneging on their promise.

The one party with the most to lose is Caisse de Depot. With $12.6 billion of ABCP outstanding, Caisse cannot afford to see this restructure unwind. Caisse is currently participating in MAP 1 and has committed to post up to $8 billion for the margin facility. Will they not step in for another $3 billion to prevent the evaporation of $12.6 billion? Finally, I would not rule out the federal government. As an election might be right around the corner, they may be growing pressure for the government to step in and fund, despite their reluctance in the past. With the tragic stories coming from individuals on the Facebook page, who really should not have been sold ABCP in the first place and the possibility of a recession, those just might be enough factors to tip to government to feel the obligation to step in and top up the margin facility.

Finally, as I have also mentioned on a blog posted on February 27, the Crawford Committee has another option. The $14 billion margin facility is required to achieve a AAA rating. I am uncertain as to whether the rating agencies involved in the restructure have made any changes to their criteria for Leveraged Super Senior CDOs, but $11 billion of funding might get us to a lower rating. As Mr. Crawford has already indicated that the notes are expected to trade at a significant discount to par, does it really matter if they are AAA, AA, A or BBB? The important thing to do now is for the Committee to complete the restructure while we still have the bank counterparties at the table.

This arm twisting exercise of trying to force the Canadian banks has proved to be unproductive. However, it could be that if the Canadian banks do not participate in the margin facility, the foreign banks may feel that they are not obligated to do so as well. This may present complications for a successful outcome.

Crawford’s Committee should be shifting gears and the priority now needs to be getting a restructure completed as soon as possible in some form, not preserving the maximum value for noteholders. A fire sale would not only be detrimental for current noteholders but for the entire Canadian economy as well.

Monday, March 3, 2008

National Bank Execs Under Fire For Being Right?

By Ross Hendin, Hendin Consultants

Saturday's The Gazette published this article covering the attack that National Bank CEO Mr. Louis Vachon and his executives are receiving because they "bought back $2.1 billion of paper from individual and corporate clients and its mutual funds after the ABCP market froze last summer".

When accused of the fact that he used shareholder money to save select people from the exposure to the ABCP, he replied:

"Shares of the bank have been more volatile than some of our competitors', and I take responsibility for that. But do I regret the decisions we took? No. I suspect hell will freeze over before I change my mind on that. The perception is that people in senior positions in the bank always do things for the short term. What we did in August was not for the short term. We took a hit. We knew it would be a difficult thing in the short term. But it was absolutely the right thing to do for the long term."

From a PR perspective, I have to say that a situation where shareholders are taking action against a CEO for protecting their brand is rare and unwise. No executive should be chastised this publicly for trying to protect the bank’s more vulnerable clients, or showing the bank stood behind the product it sold.

To put this in another context, imagine that you heard that a few bottles of children's vitamins were poisoned at a manufacturing plant in China, and that this poison affected some of the brands that you use. Hearing about the poisoning, only one company does a recall of the product in question from the shelves (let's say that's Centrum for arguments sake). The other companies sit quietly while the manufacturing authorities investigate the situation. The head of Centrum then gets up and says that not only have his customers been wronged through a product with the Centrum name, but he is a Centrum user too and has been using the same products that his customers have. To make sure the customers know they can trust Centrum, he's going to do a recall of the product outstanding to the groups that need refunds the most.

And then that CEO, who is also a user of the company’s products, is trying to defend the brand and protect clients and is chastised for his actions.

CEOs of corporations today need to be champions of their brands, and need to defend them and keep the trust of their clients. It's paramount to any success in business.

The message that National Bank shareholders are sending to the market is that anyone who tries to buy back ABCP - or more fundamentally tries to stand behind their product and the integrity of the paper - will be reprimanded. What does this say about the perceived integrity of the notes? What will happen when no other bank CEO will want to do the right thing and be criticized for it? And probably most importantly, will shareholder actions against the executive actually cost the bank more than the buyback would have been in terms of bad publicity, last of consumer confidence, and potential legal action?

At a critical time in the restructure, with BMO about to let 2 conduits meltdown, questions arising about who will fund the margin facility, who will provide liquidity to noteholders in need, etc.; Mr. Vachon's critics could not have picked a worse time to challenge what he and I agree is the right decision.

Saturday, March 1, 2008

ABCP Restructure has been delayed to April

By: Daryl Ching, Clarity Financial Strategy

The Crawford Committee announced in a press release that complete information on the Restructuring Plan (including sufficient information to enable all investors to make a fully informed decision) and details of the approval process will be made available by March 14, 2008. The intention is to give noteholders one month to review the Plan, seek approval by mid-April and then close by end of April. The Committee is still optimistic that the Canadian banks will support the Restructuring Plan, despite BMO’s announcement that they may walk away from the table.

As the release did not confirm an extension of the Standstill, can we implicitly assume that the Standstill Period has been extended? I wanted to confirm for myself that the Standstill Period had been extended, as a document is executed each time that happens. This is important because the Standstill Agreement calls a ceasefire on several actions including margin calls, law suits, and liquidity draws. Without the Standstill in place, any party can call an event of default, which would unwind the whole process.

The latest Standstill Agreement was executed January 25, 2008. It basically states that the Standstill Period will be extended to March 14 on the condition that all parties provide written confirmation by February 22. If this condition was not satisfied by 5:00 PM EST on February 22, then the Standstill Period should have expired at 5:00 PM EST on February 22. Did the Committee receive all the written confirmations by 5:00 PM on February 22? If not, should there be another document that supersedes this one to confirm the Standstill extension?

I think investors need to continue directing some tough questions to the Crawford Committee:

  • Has the Standstill Agreement been extended to March 14? If so, where is the underlying documentation?
  • What information will be available in the Restructure Plan? Will the Committee release all the methodologies for the rating as well as data so investors can seek a second opinion on the valuations, or will they need to rely solely on JP Morgan?
  • Why is Mr. Crawford still optimistic about rallying Canadian bank support in light of what has happened with BMO, and even CIBC? What kind of arm twisting exercises are taking place behind those closed doors to force them to participate?
  • If the Canadian banks will not participate, does the Committee have a backup plan? Will JP Morgan step in?
  • Has the Committee considered restructuring to a lower rating so we can stop this arm twisting exercise and trying to force banks to participate in a margin facility before credit conditions get worse and everyone leaves the table?
  • Exactly what measures are being taken by The Committee to encourage liquidity for the restructured notes?

Thursday, February 28, 2008

National Bank lets the cat out of the bag - standstill is still in effect

By: Daryl Ching, Clarity Financial Strategy

Nicole Mordant and Lynne Olver from Reuters published an article that confirms that the non-bank ABCP negotiations are still on track. Interestingly enough, the source did not come from the Crawford Committee but from National Bank. National Bank reported their Q1 results today announcing that their ABCP is stilled valued at $1.71 billion, which represents about a 25% write down. Bank CEO Louis Vachon repeated that he doesn't expect National to take further writedowns on the paper unless there is a severe U.S. recession or a disorderly liquidation of the ABCP conduits, neither of which he anticipates.

"We are getting much closer to execution and documentation and obviously that creates more complexity... But all parties are fully engaged and we are very confident that the process will reach a successful conclusion," said Ricardo Pascoe, Co-President and Co-Chief Executive of National Bank Financial. Mr. Pascoe also indicated that the standstill is still in effect and no margin calls have been made.

We applaud National Bank for speaking out and answering a very important question on investors’ minds. Is the restructuring still on track and is the standstill period still in effect? However, it would bring the market much comfort to hear this from Mr. Crawford’s Committee. We are hopeful that as the dust settles with BMO’s conduits, that the Crawford Committee will be forthcoming with their progress.

The Big Game of Chicken

By: Daryl Ching, Clarity Financial Strategy

I will be on the Business News Network at 2:45 PM EST to speak about the BMO CDO conduits - Sitka and Apex Trust. However, I will focus my blog today on the repercussions for the non-bank ABCP.

DBRS has downgraded Sitka and Apex Trust to the equivalent of CCC. They are technically in an event of default, because bank counterparties made margin calls, and to date all the parties failed to implement a restructure or post the required margin. BMO now has two days to remedy this situation or the bank counterparties will have the right to seize the assets in the trusts and proceed with a firesale. BMO faces a serious predicament. Should they post the required collateral (that will result in an additional $495MM in writedowns) or let them sink? I will discuss this decision on BNN.

Either decision they make begs the question about whether they are still going to stay committed to the margin facility for non-bank ABCP. Let’s just say for the sake of argument that BMO is more likely to bail out their own conduits than non-bank conduits and they decide to walk away from Mr. Crawford’s Committee. What then? Does CIBC pound their fist and say “Wait a minute! We’re in a dire situation too. Why should we have to participate then?” All of a sudden we may see this big game of chicken being played by the Big Banks. Nobody wants to see a $33 billion meltdown, and yet nobody wants to step up to the plate to be the saviour either.

Now let’s think back to December. On a conference call on Christmas Eve, Mr. Crawford mentioned a mystery banker that could step into the shoes of the Canadian banks if they did not step up. That mystery banker was identified to be JP Morgan, which some participants pointed out was a conflict of interest. However, fast forward the clock a couple months and the credit environment is significantly worse today than it was in December when the margin facility was first proposed. Is JP Morgan going to save the day or are they having second thoughts as well? This is likely causing the delay for Mr. Crawford’s press release.

Wednesday, February 27, 2008

Deafening Silence - What is happening behind those closed doors?

By: Daryl Ching, Ross Hendin

While the Crawford Committee has been quiet, participants in the market certainly have not been. The Facebook forum has had a high volume of comments. We have been inundated with numerous questions from ABCP noteholders and media about our thoughts on what is happening at this moment. The Clarity team has been thinking a lot over the last couple days about why there is a silence and what possibly could be happening with the Committee. While we have come up with a few thoughts that we are happy to share with you, we want to remind you that they are educated guesses at best, and these are conclusions being drawn with no input from the Crawford Committee.

Ross’s Perspective: So let’s start with why the silence?

It's no secret that the Committee has been doing whatever it can to keep its developments and actions as quiet as possible, while still trying to appear forthcoming and heroic. Every deadline the Committee has set so far has been for Friday at midnight, when nobody is around to celebrate their victories. They also had a media conference call last Christmas Eve at 12.30 PM - about the last time in the world anyone would want to hear about financial news. I have been saying for months that the point of their strategy has been to appear forthright but in reality be very secretive about their activities, and it could be that this week, we have seen their strategy be taken to another level of secrecy - total silence to the public.

The only comments that have recently been drawn in public are from private individuals who want this dealt with transparently and quickly so that they can find some economic relief and value in the notes sooner rather than later. These people, who should never have held ABCP at all, are understandably irate at the process. The other thing that the spotlight is doing is forcing accountability for the Committee. With so many people doing their homework on what's really happening, and starting to see how the Committee itself may profit from this work, there is increasing speculation and pressure growing in a forum that really has little impact on the restructure itself or the parties involved.

So, I can imagine that for the Committee, and the vast majority of corporations and individuals that want to see this restructure happen, the best thing for Mr. Crawford to do is keep the story and the reporting out of the media and the public attention. With no reporting or interviews at all, the media will have nothing to report on, and with nothing to report on, the Committee can continue to operate in the darkness that they have been striving to find for months. Silence, in the scenario they find themselves in, really could be golden.

Daryl’s perspective – Three possible scenarios

The latest standstill agreement states that the standstill is in effect until March 15th, unless the banks do not sign up by Feb 22, in which case it expires on Feb 22. I am not sure whether to take the silence as the banks have signed up and the Crawford Committee does not feel the need to issue a press release until March 15 or the Committee is still having problems seeking a commitment from the banks on the margin facility.

Based on Ross’s comments, I believe the most likely scenario is that the Standstill period has been extended or is close to being extended but Crawford’s Committee has not made the progress that they would like. The Committee is fully aware that short of coming out with news that the Restructure Plan is fully complete (ready to vote on) with final terms and conditions and full commitment from the banks for the margin facility, any news will be met with great disappointment. The Committee is likely trying to prevent various parties from taking immediate legal action. Silence may be a better deterrent than a press release stating that they are still not quite there yet on the restructure.

The second scenario may be that JP Morgan has decided to move to a AA, A, or BBB rating for the CDO tranche. While a AAA rating would be ideal for noteholders planning to sell the notes in the secondary market, a lower rating would likely decrease the required size of the margin facility and probably relax the spread-loss trigger to a level more palatable for the bank counterparties, who would like to be able to make a margin call sooner rather than later. If this is the case, the Committee will need to switch gears and renegotiate the quantitative terms and conditions with the various parties.

Finally, the last scenario is the worst one. It could be possible that the Committee has simply not been successful getting all the parties to agree to the terms and conditions, and is unable to do so. Under this scenario, the Investor Committee will disband, the Standstill period will cease and investors will be left with the old notes they had originally purchased. This would lead to margin calls, more calls for liquidity from the banks, events of default, firesale of the assets and a hailstorm of litigation. Because there is so much at stake, we do not believe this to be a likely scenario.

Tuesday, February 26, 2008

BMO CDO Conduits under fire

By: Daryl Ching, Clarity Financial Strategy

On Tuesday, February 19, we posted a commentary on DBRS downgrading five trusts within the Montreal Accord for having US RMBS subprime exposure. It appears that it not just the non-bank conduits that are being impacted by the credit crunch. The latest news from DBRS is that Apex Trust and Sitka Trust have been placed under review with negative implications (BMO is the Securitization Agent to Apex and Financial Services Sub-Agent to Sitka).

Similar to the non-bank ABCP restructure, BMO is in the process of restructuring their CDO conduits, probably in a manner very similar to that of the Montreal Accord. DBRS quotes, “However, as of the date of this press release, no formal stand-still agreement has been agreed to. If a stand-still agreement is not agreed to quickly, or additional notes are not issued to satisfy the outstanding collateral calls on a timely basis, the Swap Counterparties that have demanded additional collateral may soon be able to seize the existing collateral thereby causing the Trusts to default.”

It appears that BMO is in a dire situation and must get a standstill agreement in place as soon as possible. They will then need to convince the bank counterparties to waive the mark-to-market triggers, if they want to prevent a firesale of the assets. This is an indication that is absolutely critical for the Crawford Committee to extend the Standstill Agreement and to complete the restructure in a timely manner with buy-in from all the bank counterparties, or we may see downgrades across the board on CDO transactions.

Friday, February 22, 2008

What can we expect for the standstill deadline today?

By: Daryl Ching, Clarity Financial Strategy

Today, I will be on the Business News Network at 4:45 PM EST to discuss status of the ABCP restructure. I anticipate that we will not have heard from Mr. Crawford's Committee by that time, but I will be providing insights on Caisse's financial statements, what some of the factors might be holding up the process, and what we can reasonably expect to hear. I will follow up with a full commentary after we receive the press release from the Committee.

Wednesday, February 20, 2008

Investors are getting educated and speaking out... on Facebook

By: Daryl Ching, Clarity Financial Strategy

Jim Middlemiss of the Financial Post published an interesting article "Engineer rallies ABCP investors on Facebook". Brian Hunter, who goes under the alias of "Windyfield" is an avid reader of the Clarity blog and has posted several insightful comments throughout some of our entries. Mr. Hunter has created a Facebook page to rally support for the smaller investors. His site includes letters to and from Purdy Crawford and Mark Carney.

Based on comments we have received from people like Brian Hunter, it appears not only are ABCP investors getting fed up with the restructure process and speaking out, but they are getting very educated on the topic. It is apparent through Mr. Hunter's comments, that he has done much research on the situation and has an intricate understanding of how all the various parties were involved with ABCP. His website is rallying support and has up to 10 users at this point.

Tuesday, February 19, 2008

DBRS Downgrades ABCP Trusts and Changes Rating Methodology

By: John Sokic, Clarity Financial Strategy

On February 15th, DBRS announced a downgrade of Planet, Ironstone, Aurora, Aria an Apsley trusts, mainly due to their subprime exposure within CDO transactions. ( All of these trusts are covered by the standstill agreement and restructuring efforts of the Crawford committee.

Also on the 15th, DBRS said it has changed its methodology for rating CDOs that reside within Canadian conduits. Specifically, they are looking to reduce their reliance on US-based rating agencies. Normally, DBRS would simply use ratings by US agencies on the underlying RMBS within CDOs, then plug them into a model to come up with AAA-level enhancement for the CDO.

Now, instead of coming up with ratings of their own, DBRS has decided to notch US ratings when they are on negative watch. The notching is fairly punitive, which DBRS calls conservative. In relation to Crawford's restructure, the assets in question all fall into the 'ineligible asset' group, also known as the subprime bucket. I have to say I am not sure where DBRS is adding value here. When I first read the headline relating to a change in their methodology, I assumed they would actually 'fess up’ and begin rating the underlying RMBS themselves. Instead, they are offering a prediction of where the other agencies will place their ratings in the future - only in Canada.

These actions make the outlook fairly bleak for that 3rd bucket of assets. The downgrades for Ironstone and Apsley are so low that they are below investment grade (R-4 or BB (high)). The others are not as bad but it would appear to mean that the notes emerging from the tranche will not have investment grade ratings and that they will have an even more difficult time trading in a secondary market.

Thursday, February 14, 2008

Can Mr. Crawford’s Committee stop legal chaos?

By: Daryl Ching, Clarity Financial Strategy

What is taking the big banks so long to commit to the margin facility? Why don’t they just sign on so we can get this restructure done? Before I answer this question, let’s not forget the Big 5 banks may have been involved in the non-bank ABCP market in several forms: liquidity provider, bank dealer, swap counterparty, trustees, structuring and underwriting.

Now let’s look at the potential chain of law suits. The two precedent law suits that have already been launched are by investors suing their “brokers” who sold them the paper. In one case, one of the “brokers” turned around sued the bank dealer who sold them the paper. What can potentially happen is the bank dealer will turn around and sue the conduit sponsor for giving them improper information. The conduit sponsor will turn around and sue the bank counterparties that sold them product. The bank counterparties may turn around and sue the banks for not providing liquidity. Somewhere in that line, one of the parties sues the rating agency for giving the assets the top rating.

The point I am trying to make here is that there is a way you can assign blame to virtually any party that was involved in the non-bank ABCP market. The banks see this potential hailstorm of law suits that can keep litigation going for years. To address this, Mr. Crawford’s Committee is attempting to avoid this legal chaos by asking the noteholders to sign a release that waives their right to sue all the parties named in the Montreal Accord.

Several questions have been asked of me by investors. “If I do not sign on the accord, can my right to sue really be waived for me if there is a supermajority approval? What if there was negligence from the dealer who sold me the paper? What if they misrepresented risks?” Unfortunately, not having a legal background and not having seen the final restructure proposal, I do not have the answers to these questions. However, talking to lawyers, opinions vary, which leads me to believe that this legal release will be subject to various interpretations from different lawyers. If you are a lawyer reading this, and have a comment, please feel free to post directly to this blog or send me an email.

Now let’s go back to my question about what is taking the banks so long to sign on to the accord. In order for Mr. Crawford to convince the various parties to make concessions to the Accord, all the parties want immunity from litigation. My best guess is that this is the sticking point that is preventing the big banks from signing on. They want to be assured that the legal release will protect them but how will they really know? They can probably only receiving an opinion from a lawyer at best. How will the courts rule if investors decide to launch law suits anyway, despite signing this release, or even worse, having this release enforced on them by a majority vote?

The other question I have been asked is “What is my interest going to be on the new notes?” Most investors know they were receiving a return greater than BA’s prior to the market freeze. The yield on most of these assets is high enough to cover the interest to investors, liquidity fees, bank dealer fees, conduit sponsor program fees, trustee fees, swap fees, etc. However, for the investors that are expecting to receive a yield commensurate to when they first bought the notes, please consider the following: the expenses for the restructure will include Mr. Crawford Committee’s fees, JP Morgan’s advisor fee, two rating agency fees, margin facility fees (currently 160 bps to standby), legal fees, trustee fees, and others. What will be left after all this paid out? Your interest. I am not saying that there will be no interest on the restructured notes, but there will be a vast amount of fees that will need to be paid to parties working on the restructure before investors even see a dime.

Tuesday, February 12, 2008

Rating agencies under fire

By: Daryl Ching, Clarity Financial Strategy

The rating agencies have been in the spotlight since the market freeze in August and have taken action to appease the public. Boyd Erman published an article in the Globe and Mail called “Regulators may clamp down on rating agencies”. The International Organization of Securities Commissions (IOSCO) may toughen the code of conduct for credit rating agencies by requiring more disclosure of rating processes, prohibiting the practice of consulting on the design of securities and requiring more research into the assets underlying complex securities.

S&P recently announced 27 separate measures to change the way they operate addressing enhancing governance, strengthening analytics, increasing transparency and educating the public. As an example, to address the conflict of interest, S&P proposes to rotate analysts so they don’t get unhealthily close to the issuers who pay for their own ratings. Moody’s has proposed to move from a letter grade system to a numerical system for structured finance. DBRS is currently reviewing the Leveraged Super Senior CDO methodology and has made a shift to requiring Global Style Liquidity for ABCP conduits.

It is worth noting another criticism of the rating agencies – an over reliance on quantitative financial models. We hear stories about the rating agencies hiring PHDs in math and physics to develop sophisticated models for the various asset classes. In the traditional securitization world, the rating agencies get comfortable with “stress testing models”. When evaluating a basket of mortgages, they will make assumptions such as an increase in losses, an adjustment in prepayment rate, a drop in real estate values, etc. Provided there is sufficient credit enhancement to protect against these stresses, the structure passes as AAA. For the Leveraged Super Senior CDOs, a key component that is stressed is correlation. As long as there was sufficient diversification among industries, geography, etc., these models would pass the test.

While the quantitative models have merit, what is missing is more emphasis on the practical approach. If mortgages are being granted to individuals in the US with low teaser rates who cannot afford them, it may not be enough to stress losses four times or to rely on a model. With the LSS CDOs, in a severe credit crunch such as the one experienced recently, correlation for defaults can easily be come 1 across all industries. Some transactions relied on hedging with credit insurers that are rated AAA. When these insurers are insuring debt at a multiple of their capital base, it is worth taking a step back and saying, perhaps this insurance is not worth a AAA rating.

The rating agencies like to rely on models because it automates processes and makes the ratings easier to do. Especially, in some cash CDO transactions that reference a hundred RMBS bonds, it would an onerous process to review the underwriting practices of every mortgage servicer. However, we have learned that this practical approach of looking at all the qualitative factors in a transaction is absolutely essential.

We certainly hope that JP Morgan and the rating agencies picked to rate the restructured notes in the Montreal Accord will apply this practical approach. It is no longer sufficient for the rating agencies to rely on old methodologies to rate structured finance products going forward.