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.

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