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.

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