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.

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