Wednesday, April 9, 2008

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.

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