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.