Wednesday, January 30, 2008

Standstill agreement ends tomorrow

By: Daryl Ching, Clarity Financial Strategy

This morning I was on the Business News Network to provide some commentary on the ABCP restructure. Please click here to view the link. The standstill deadline or ceasefire ends at the stroke of midnight tomorrow, and we have not heard any news from Mr. Crawford’s Committee in the New Year. If they remain consistent, we will probably see a press release at around 12:30 AM on Friday morning.

DBRS issued a press release commenting on Leveraged Super Senior (“LSS”) transactions in light of the global market volatility. As a result of the unprecedented events in the global markets, DBRS has commenced a review of its mark-to-market (“MTM”) trigger methodologies for LSS transactions. Several LSS transactions have faced or are likely to face margin calls. On January 25, four conduits that are not part of the Montreal Accord, containing at least one LSS transaction with a MTM margin call were placed under review with developing implications. The reason why the trusts in the Montreal Accord are not being downgraded is because they have the benefit of the standstill agreement, in which no margin calls wil be made, which is set to expire January 31. Also, the restructure is moving towards spread-loss triggers, which makes the chance of a margin call more remote.

In the absence of the standstill agreement, a number of trusts would have already been required to post margin. In a normal credit environment, the margin requirement could have been met by: 1) issuing additional notes, 2) negotiating a revised margin call, 3) using other sources of liquidity. Unfortunately, the trusts within the Montreal Accord do not have access do any of these options and therefore the margin call would go unsatisfied, causing an event of default. This would then allow the swap counterparties to liquidate the assets in a distressed credit environment. “Considering the volatility and uncertainty in current credit markets, it is possible that a swap counterparty would not recover all of the costs associated with liquidating the collateral and unwinding the transaction at market value, thereby leaving Noteholders with very large losses on their notes.”

The press release ends with this paragraph; “Therefore, any Conduit that does not benefit from a standstill (as is the case with the Affected Trusts) or benefit from sponsors that either have or will restructure the MTM margin call regime, will most likely face immediate and substantial rating action.” Therefore, we are in a situation where the standstill agreement must be extended again and the notes must get restructured or noteholders may face substantial losses.

Based on the press releases back in December, a few things were expected to happen in January 2008. Crawford’s Committee anticipated that they would have a firm commitment for the $14 billion margin facility from the banks, an administrator and asset manager were to be selected and restructure proposals would be released for the current noteholders to vote on. Based on the silence from the committee, I have reason to believe that none of these have happened as of yet.

However, if history repeats itself, it is my opinion that Mr. Crawford’s Committee will be successful in achieving an extension of the standstill agreement. The process is too big to fail, and support can easily be obtained by the largest investors who are incented to wait out the process and hold the assets to maturity. However, considering the situation, I suspect that March 2008 is a very optimistic deadline for the completion of the restructure. Investors should manage their expectations as this restructure can take much longer than expected.

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