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?