Wednesday, January 23, 2008

ABCP represents challange for accountants

By: Daryl Ching, Clarity Financial Strategy

Ken Mark, from the Bottom Line, a Lexis Nexis publication aimed at accounting and financial professionals, published a great article recapping the ABCP story. Click here to view the article. We have received numerous questions and interest in the ABCP situation from accountants. For the second consecutive quarter, auditors are still scratching their heads about how to value exposure to non-bank ABCP.

CNW Group has also released an interesting article “Canada's CAs call for clear disclosure of ABCP holdings”. What investors thought were high quality, cash equivalent investments are being restructured into long-term holdings with no clear indication of time to maturity or valuation. Crawford’s Committee holds the information and JP Morgan has completed its valuation of the assets. However, for reasons of their own, they have decided not to release this information to the public.

Accountants have been asking me how to value the non-bank ABCP. At this point, the simple answer is that they can’t, at least not in a meaningful way. We have seen corporate write-downs ranging from 5% to 40%. The only public trade that has taken place was by Westaim and we know they sold their ABCP for 70% of book value with some upside. While this trade sets a precedent, it does not set a market value for all instruments. The value of the ABCP will depend heavily on which trusts were purchased.

JP Morgan’s valuation will be very useful information, as it will provide some colour as to the anticipated recovery value on the assets if they are held to maturity. However, for companies looking to sell their restructured notes, there is great uncertainty about what the secondary market will look like. As the restructure is scheduled to close by the end of March 2008, it may take potential buyers a couple of months to digest the information in order to make meaningful bids. Therefore, we many see any trading until May 2008.

Unfortunately, in this vacuum of information, companies having to report their results are left in the dark, just as much as their shareholders. Substantial financial decisions and budgeting activities will continue to be put on hold until they receive more clarity from the Crawford Committee as to what these assets are truly worth. In the mean time, shareholders will need to settle with vague disclosures about ABCP holdings and a best guess at valuation, which may or may not reflect true value.

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