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.

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