Wednesday, April 30, 2008

After the vote, is the end really in sight?

By: Ross Hendin, Hendin Consultants

According to this article, almost 96% of the noteholders voted in favor of the restructure, but that in no way means that it’s going to happen right away.

A few corporate noteholders are upset at what's happened to them – that either they feel the restructure itself isn’t fair, or the reason they hold the product in the first place because of unfair play on the part of their banks. In an effort to join the retail clients and also be made whole, some of them have tried to band together while others are making claims on their own – which may prevent the restructure from happening on time – by their first asking that they become their own class of noteholders (and therefore have veto power) and presently by asking the Court to limit the scope of the restructures legal releases, so the corporates can sue the banks for fraud, gross misrepresentation, and other issues around how they found themselves holding ABCP in the first place. According to this article in Bloomberg, Benjamin Zarnett, who represents the Committee, told the Court that the banks that agreed to provide back-up financing to the for the new notes will withdraw their support if the releases are trimmed.

The vote was allowed to go on as planned, but now that the vote has happened, the Court is in an awkward situation: caught between the rights of corporations, the broadest legal release ever in a CCAA agreement, and the reality that if a $32 billion dollar market melts down, the repercussions will be massive and international.

If it's possible, this has become a far more dangerous game of Chicken than the retail investors played. The stakes are much higher, as the focus will ultimately return to the Banks - the last place anyone on Bay Street wants them to be. Criticism for the plan itself is really superficial next to the illegal undercurrents that companies such as Barrick are pointing to, and it makes me wonder what will happen when the time comes for everyone to put their confidential documents in front of the Court in an Examination for Discovery. According to their motion, Barrick says that CIBC confirmed that their investments didn't have subprime exposure, when in fact they did. Barrick also makes a point of saying that they bought more paper just prior to the market freezing - which made me wonder if that purchase was made before or after the release of the now infamous Coventree letter.

Barrick also state that they were misled by the Investors Committee, saying it didn't come through on a deal to allow Barrick to retain litigation rights.

So, to give some context, what Barrick is saying isn't that they want to hold up the process, see this melt down, or have a nuclear button they can push to hold everyone hostage, what they are saying is that they feel strongly they have been wronged, and they want the right to be able to seek vindication for it.

This to me turns the Barrick / CIBC situation into a game of Chicken. CIBC may be assuming that Barrick and the other companies like it aren't going to be able to sue, so they are sitting tight. If CIBC were to try and make them whole, there are probably a number of other clients who would line up behind Barrick for the same treatment, and even more scary, the corporate clients of the other banks would go to their account managers and say "if CIBC is doing it, why aren't you" - the domino effect so begins. It's therefore in CIBC's interest to wait it out for a while, and hope that Barrick, Jean Coutu, Transat AT, Redcorp, and the many others involved in this corporate noteholder offensive are tainted as the companies trying to ruin the process for the market and are pressured or decide to back down.

From the corporate noteholders perspective, pushing to be able to sue is critical because they aren't concerned about the new paper as much as they are annoyed that they are in the situation in the first place. They are pushing here for transparency and to call the bank out because their banks may have sold products they either didn't know enough about, or knew about and didn't share the information with their clients. To the corporates, it may be worth holding up the restructure another few weeks and risking looking selfish to get to the bottom of the problem and push to be made whole, or open the Pandora's box that is the actions of the banks before the market freeze. If they are successful in being able to sue, I'm sure that CIBC will either threaten to walk from the margin facility, or will fold on the case very quickly and make them whole. Why? Because I'd bet CIBC cannot afford to let this suit get to an examination for discovery - a process by which Barrick and eventually the Court will be able to seek disclosure for internal documents.

And so, if the Court rules that the banks can in fact be sued for fraud and actions that put their clients in the midst of the freeze, there is a good chance that CIBC and maybe other banks will walk from the facility and once again the risk returns that the market will meltdown. Even if that (hopefully) doesn't happen, what it does is open up the banks to a lot more questioning and scrutiny by their clients. Over-regulation and transparency by Flaherty going forward will be the least of their problems, as they will have to decide between finding the money to make their clients whole and risking the Court, and the court of public opinion, see what really happened in the months before the meltdown.

A reality exists that it’s in everyone’s interests to have the restructure happen, and then have the banks buy the new notes from the clients and make up the difference in their value, than it does to put the entire process at risk like this.

The story is taking now taking a turn to litigation and public relations strategy. Every word and every motion on the side of the Banks will be essential to their survival in this period of the ABCP saga, just as it will make the difference for the corporates between being remembered as “commercial crusader” or “that company that sparked the largest financial meltdown in Canadian finance history”.

Ross Hendin is CEO of Hendin Consultants, and is a Senior Advisor to the Canadian office of a leading multi-national PR firm. With strategic communication experience in more than 20 countries around the world, Ross specializes in litigation, financial and political strategic communication. He has worked in the ABCP niche since 2006. Hendin Consultants is in Toronto and London, UK, and is on the web at Email Ross at

Monday, April 28, 2008

Not quite out of the woods yet

By: Daryl Ching, Clarity Financial Strategy

Although we have received a majority Yes Vote, there are still a couple obstacles before Mr. Crawford's Committee can move forward with the restructure. Justice Campbell has committed to continue hearings on a case by case basis from corporate note holders who are refuting the legal release. Justice Campbell will give his final ruling on fairness to move the plan ahead on Thursday.

It is expected that some corporate note holders such as Barrick Gold may seek appeals if legal immunity is granted to the various parties. The appeals might escalate the restructure to the Supreme Court of Canada. This could potentially cause a delay in the restructure for months.

Thursday, April 24, 2008

Vote on ABCP Restructure Plan to proceed tomorrow

By: Daryl Ching, Clarity Financial Strategy

I will be on the Business News Network tomorrow 10:35 AM EST to discuss this in more detail.

Despite efforts from corporate note holders over the last couple days to delay the vote and be treated as a separate class under CCAA, Judge Campbell decided to proceed with the vote on the restructure plan tomorrow in its current form. With Canaccord’s and Credential’s relief plans in place, a majority vote for Yes is a foregone conclusion. In all likelihood, the court will approve the restructure on May 2 after the vote, and we can expect a secondary market for the restructured notes to open in June 2008.

Shortly after news of a retail relief plan, corporate note holders started to raise their voices about unfairness and how they were caught in the middle with no buyout. Several motions were filed to delay the vote, be treated as a separate class under CCAA with veto power and to be waived from the legal release. All these motions have been denied, because Judge Campbell felt they would cause a failure of the restructure plan, which would have catastrophic consequences for a large number of parties.

However, Judge Campbell agreed to conduct a fairness / sanction hearing after the vote to review the legal release on a case by case basis. The legal release is an extremely important component of the restructure and was required in order to bring the various parties to the table and have them make concessions. To remove the legal release, would be a material enough change to the restructure plan, that they would need move to square one, or even worse, the parties would walk away from the restructure.

In my opinion, it is going to be extremely difficult at this point for current note holders to pursue litigation. They will likely need to be able to prove fraud or gross misrepresentation of the ABCP to be successful. The various bank dealers will point to the fact that the ABCP crisis was a systemic issue, with multiple parties to point the finger at.

Thursday, April 17, 2008

April Could Have Been The Month Of The Corporate Crusader

By: Ross Hendin, Hendin Consultants

Since the announcement that most Canaccord clients were going to be made whole, a number of groups have thrown their arms up and demanded the same treatment. Of course, because the Committee has been hands-off of the buyout, it has very much been every group for themselves in front of the Ontario Superior Court, to challenge the CCAA in whatever form they can.

The Credential Securities noteholders, who are exactly like the Canaccord clients except their numbers are too small for them to have a material impact on the vote itself, may also be finding a buyback offer on the table imminently.

Where does that leave the corporate noteholders that I spoke about here, or the ones that are attacking National Bank directly? According to this article, Montreal Businessman Hy Bloom and his counsel were pushed out of court for reasons including the potential economic chaos and impact on thousands of Canadians if the Plan fails. I know that other counsel representing other companies have also put forward motions, but as of now, those motions have not delayed the vote.

According to this article, the next move may be to wait until after the restructure is complete, and then go after the Committee and / or the groups that were apart of the "systemic breakdown". Mr. Crawford is apparently expecting that to happen, which I can only assume means that the parties to the ABCP market are also bracing for a legal battle to begin.

From a PR perspective, the idea of biding time now seems like a good one for the corporates. On the one hand, using PR in these weeks to discuss corporate unrest and the damage that this freeze has caused companies may seem somewhat irrelevant next to the needs of the retail clients, but as the vote successfully concludes and the notes are restructured, we may end up seeing a number of corporations take a legal avenue. If they all do it at once, every one of those companies will probably lose the chance to tell their story to the court of public opinion, and in fact, the market itself may become bored of the story and choose not to cover it.

It leaves the many companies that will be involved in this without the upside of visibility.
As I've said, April is the time for smart corporations to be pleading their case to the media, and to consider discussing possible ways that they will take legal matters into their own hands. The University of Western Ontario's Pension Fund could have organized a rally, telling their students that their professors have lost millions to this Canadian black-box investment. Mining companies could have shown videos of the mines that are no longer working as a result of the liquidity crunch, etc. And all of it, at the right time, would have made them corporate crusaders after the successful vote, when they decide to "invest in justice" rather than simple stay quiet and "throw good money after bad".

Wednesday, April 9, 2008

Yes Vote locked down by Canaccord relief plan, but what’s next?

By: Daryl Ching, Clarity Financial Strategy

Canaccord has agreed to buy back ABCP from all their clients holding $1MM or less on the condition of a successful restructure, which represents 97% of their retail clients. Canaccord has agreed to top up a market bid, which is in the range of 60% from an unidentified investor. Assuming that retail clients accept this deal, this is closest we have ever been to securing a Yes Vote locking down 1,430 votes in favour.

While many numbers have been thrown around, there remains another 800 or so retail clients and 300 institutional and corporate clients that have not yet received the benefit of a relief plan. However, the reality has become that they will need to operate under the assumption that restructure will be approved and all terms and conditions will be binding on all note holders, including the legal release. Instead of asking the question of “Should I vote yes or no?”, the more important question to ask now is “What are the implications of a yes vote and what do I do with the restructured notes?

Note holders who receive restructured notes will need to get educated and form a view on the value of their holdings. This is not an easy task, as the value varies across trusts. Market conditions have changed significantly since JP Morgan’s report dated March 4, 2008. Note holders will have three choices: 1) Sell the notes right away in the secondary market, 2) Hold the notes for an interim period and sell when a secondary market becomes more developed, and 3) Hold the notes to maturity. In order to make that decision, note holders will need understand all the underlying assets, how to value them, and place a value on the structural components added by the Crawford Committee like the move to the spread-loss trigger and the $14 billion margin facility. Even if the decision is to sell, this will help them determine a fair value when negotiating with potential buyers.

The ABCP situation has been a huge roller coaster ride with different twists and turns coming out virtually daily. However, this is a key turning point and we are closer than we have ever been to a certainty of a complete restructure. We urge note holders to get educated, figure out the value of the notes being held, even if it is just for accounting purposes, and make an informed decision.

There may be sunshine over the hill after all

By: Daryl Ching, Clarity Financial Strategy

There have been some important recent developments in ABCP restructure. CIBC announced yesterday that they have agreed to contribute $300MM to the margin facility filling the final gap to an aggregate of $14 billion, joining the other five big banks in Canada. National Bank also announced that they will be extending credit facilities to 100 of its business clients of up to 75% of their ABCP investments for two years with extendible terms. Canaccord and Credential Securities have announced that they are very close to finalizing a relief plan for their retail clients. The Crawford Committee announced that they will be hosting a conference call on Monday.

Why are we seeing such positive developments now? First, participants must be fairly confident that the relief plan for retail investors will be accepted and therefore they are confident about a Yes vote. I also make this assumption because of the scheduled conference call by the Crawford Committee. I can’t imagine any reason why the Committee would agree to host another conference call for note holders at this time if there is no new news to report after the tough road show they just completed. They must be expecting a relief plan to be finalized by the end of this week.

What this means is that a group of institutions have agreed to step up and take on the restructured notes. It is also important to note that the credit environment has significantly improved over the last couple weeks. Credit spreads have tightened significantly. As an indication, if you look at the TSX, it seems to have stabilized and we are not seeing 300-500 point swings like we saw earlier this year. Many analysts have predicted that we have seen the worst of the credit storm.

If we assume that the credit markets have stabilized and we will not see the swings we saw in January and February, then there is greater confidence that the addition of the margin facility and the move to spread-loss triggers will be enough to ensure the new notes receive full par plus interest at maturity, which is expected to be in nine years. Further to that, current note holders who are hoping to sell their notes in the secondary market can also expect bids from potential buyers to be higher.

The Crawford Committee continues to work at dotting i’s and crossing the t’s on the restructure plan. As an example, we still do not know if the interest rate will be based on 1-month BA’s or 3-month BA’s. The restructure plan also indicated that there are several trades still being negotiated with certain bank counterparties – CIBC being a key one, which appears to have been resolved yesterday. The Committee is also working on populating the E&Y Data Room.

At Clarity, we are now much more confident about a successful ABCP restructure. It has been a roller coaster ride with positive and negative news coming out almost daily. Although we recognize that there is no certainty until after the vote on April 25, there just may be sunshine after the hill after all.

Monday, April 7, 2008

Pulling A Head out of the Sand

By Ross Hendin, Hendin Consultants

There have been a number of posts on the ABCP Facebook forum, and questions being asked in he public domain about the few hundred note-holders who purchased ABCP through Credential, a credit-union in the West who have done an outstanding job at keeping their heads in the sand until now.

Essentially, Credential is a "national wealth management provider founded by the Canadian credit union system". They have a few contact numbers on their website but, from what I have been told by Murray Candlish and have seen from the press, they are not returning ABCP client calls, and are trying as hard as possible to do as little as they can.

One of their more high-profile clients, who will not be named on this blog specifically, was told by his Credential IA when he was making the investment that "if this investment fails, the whole financial system in Canada would probably fail." They have also not yet provided their noteholders with any information or support to help their clients through understanding the restructure or the voting process (this client requested both in writing and over the phone from them a few weeks ago). The following day, this client received an email that Credential was "monitoring the situation", and the day after that, when this client got in touch with their head office to request a list and contact details of Credential's Board, Credential's staff told him to get in touch with his IA for that - which wasn't possible for him because Credential actually blocked his email address within 2 days.

While the horrible behavior and optics of this situation are worthy of their own blog on what NOT to do with customers / crisis in any industry, I want to use this space to articulate a few finer points on what both the Credential clients and Credential themselves should consider, from both a Public Relations and general strategic perspective:

Credential clients, keep focusing on telling your stories and make sure you have a very clear ask for Credential to respond to. Asking questions in public may be the only way to get them heard by the seniors at the company. What is currently being considered in the relief plan? What, if anything, can Credential do today to better arm their clients before the vote? Why is the Board so difficult to find? Why would a company block a client's email address - what questions can they not afford to have asked?

Credential - at this point, there is nothing to gain either legally or optically from blocking clients' email addresses. What you should be concerned about now is trying to rebuild your reputation and it starts by doing the best job you can for your clients. After the dust settles in this mess, they are the ones that will have to forgive you. It does not matter if your clients are not internet users, or they will be irate when they find out that their money is frozen and there is a chance it will vanish... what matters is how to tell them, how you help them, and where you go from here. Your business, and the allience your business is in, is totally built on trust and the understanding that the Credit Unions and Co-ops are NOT Bay Street players, but are real people working hand-in-hand with the communities because you are all from the same place and on the same page. As this story starts to spread through those communities, that trust will vanish and will take a very long time (if ever) to rebuild. If your clients see you as worse than the people that wear suits to work in Toronto, your business could disappear. There are a number of case studies (Tylonol is one I refer to often) that show how putting your clients above all else keeps trust and is critical to rebuilding when the dust settles. I strongly urge you to call communications specialists and get your clients armed, informed and trusting you again as quickly as possible.

Friday, April 4, 2008

Corporate Noteholders: Investing In Becoming Critical?

By: Ross Hendin, Hendin Consultants

In yesterday's Financial Post article, Mid-Sized Investors Plotting To Unite, John Greenwood has told the ABCP market and all its spectators that the minority noteholders (those that are corporations holding ABCP, rather than the retail noteholders that are individuals) are considering posturing for a bailout themselves. Their wanting a bailout is perfectly natural, as said to John by a CFO of another mining company:

"You do something for one group and not for everyone else... I don't see how they can offer this deal [to retail investors] but not to the others."

Where corporations have understood that because they are a minority in terms of the number of votes they have, and the amount of paper they hold relative to the market size, simply threatening to vote "no" is not compelling enough to push anyone to buy their paper and risk a loss of their own. But does this mean that corporations are stuck going along for the ride? Not necessarily. The same thing that limits sympathy for the corporate noteholders also empowers them in a way that the retail clients are not able to think or move: their resources. Corporations holding ABCP have a relatively less severe reality to retail noteholders, but they also have resources to take any actions or devise any strategies they want, which makes this group potentially critical on a very different level.

The corporate noteholders have deep pockets, and while some corporate noteholders feel that sending lawyers after the banks is just throwing good money after bad, many others realize that their are a number of ways they can try to collect through different legal and public relations strategies. These companies have now seen the retail investors organize and become vocal, and have taken notes on what they did right, and what can be improved. For example, should the corporations start a Facebook group? Probably not, but they may have learned that one company who emerges as overly vocal and calling to arms may find others easily. They may also have learned that the tragic stories of the retail noteholders are far more compelling than the woes of a company that remains cash-flow positive, but that does not in any way stop them from telling the market about potential legal remedies should they vote "no", or about critical insights they have found making a "yes" the right option.

As long as a few corporations see organizing and building a strong strategy for themselves as a smart way to hedge their bets, I will not dismiss them as an irrelevant minority. I have had enough conversations with counsel over the last number of months to know that there are a number of different strategies / concepts out there that are just waiting to be explored, and after reading this article, it looks like there are more than a few companies ready to explore them.

Wednesday, April 2, 2008

Clarity provides comments on ABCP restructure plan

By: Daryl Ching, Clarity Financial Strategy

It has been quite some time since our last post. The analysis of the restructure plan has been far more difficult than we ever imagined, but we have reached a couple conclusions that I would like to share with readers of this blog.

It has become apparent to us, without much surprise that investors generally find the restructure plan completely incomprehensible. The truth is that there is absolutely no way a 385 page document and a two-hour presentation is nearly enough to help people understand the complex mechanics of ABCP. Even being in the industry, it took me months to wrap my head around the structures, and I have a finance background.

By now, most of you know that the Class A Notes for the CDO tranche are only being assigned a AA-rating from DBRS. Other rating agencies have declined to rate the structure. We believe this may either be because they did not deem the structure to be AA or have withdrawn ratings on leveraged super senior transactions altogether. We began our analysis by reviewing the CDO methodology used by DBRS and running the models that we usually would. The margin facility combined with underlying collateral to support margin calls is well over 100% of the leveraged super senior notes. The spread-loss triggers, which are benchmarks, that if crossed will cause margin calls are set a level far more remote than previous structures we have seen. So it is a better transaction than what we have seen in the past. Does this make us AA confident about the new notes?

While financial models are a great tool to assess value and risk, it is important to note that they have proven to be wrong. They generally look at credit cycles over a historic period and map out worst case scenarios with a certain confidence interval. However, we have seen things happen over the last couple months that were unthinkable a year ago. No financial model predicted:

  • The global liquidity crunch we are seeing today
  • AAA rated monocline credit insurers like Ambac asking for a bailout and losing 90% of its market share
  • Hundreds of billions of write downs from the world’s largest banks that were perceived to be conservative
  • The collapse of Bear Stearns and a potential sale at $250MM, once one of the world’s largest financial institutions
  • Citigroup, once the world’s largest bank losing half its market share

For these reasons, individuals, including myself have lost faith in quantitative models to predict risk. Even if the margin facility was $20 billion and the spread-loss triggers were set at 600 points, I’m not sure anyone would give a AAA stamp. Unfortunately, LSS CDOs have a high correlation with credit volatility and take on a significant amount of market risk. We may never see a AAA-rating again on this type of product again. It is important to keep in mind that you can never create a structure that has a 100% certainty of recovery. Unfortunately, you will always have “tail risk” or unlikely events that fall into the 1% bucket and they have happened.

So are the restructured notes solid? We think that the financial models have merit and need to be understood but must be supplemented with common sense. The credit protection provided for the restructured notes are certainly higher than we have seen in previous transactions and is likely the best deal we will be able to get based on negotiations from the Crawford Committee. Some economists believe we have seen the worst and are at the trough of the credit cycle. The credit markets have actually improved significantly in the last couple weeks. We heard news yesterday that UBS wrote down another $19 billion due to the mortgage fallout, but were able to raise $15 billion in fresh capital. Analysts have indicated that the worst might be over and investors have not given up on the large banks. The news was viewed positively as the Dow Jones continued to surge 3% despite this news. Credit spreads improved yesterday. So there may be light at the end of this tunnel and it may be within reach.

However, if the markets continue to decline the way they have from August to March, all bets are off. Two or three more Bear Stearns type incidents can rattle the market to the point where the new triggers will get breached and the margin facility will get fully drawn.

In short, we need to understand the financial models and take a view from macroeconomic perspective. Your views on the restructure plan will also depend on whether we will experience a deep recession and to what extent the credit markets will continue to get rattled with bad news. While we may not be AA confident, we still believe the restructured notes are sound and will return full value at maturity.