Restructuring Aims to Give Canada’s Debt Market a $33 Billion Lift

The Crawford Committee managed to secure its rescue effort to restructure $33-billion in asset-backed commercial paper (ABCP) in time for exhausted negotiators to take a holiday break, but some of the banks have still not signed on.

Sources familiar with discussions said some of the Canadian banks have thus far declined to sign an agreement to provide funding support to the sector because the formal request came late last week, when a number of senior executives had already left for the Christmas break.

The committee that's working to fix the sector wanted the banks to contribute more than $2-billion to a $14-billion margin facility that will be key to the restructuring.


A tentative restructuring agreement should unlock a $33 billion portion of Canada’s debt market that has been frozen since August, its chief architect said on Monday.

Fears about subprime lending in the United States led to a liquidity crisis in Canada’s market for asset-backed commercial paper that had been sold by dealers not owned by the country’s six major banks.

A standstill agreement in August prevented the collapse of the market but created problems for some investors, particularly businesses that had bought the short-term debt to park cash they planned to use later.

Under the agreement reached Sunday night, the asset-backed paper, which is mostly made up of auto loans, market rate mortgages and credit card receivables, will be repackaged to make it more attractive.

A crucial element of the plan involves segregating 3 billion Canadian dollars (about the same in American dollars) in subprime mortgage debt, and then packaging it with a similar amount of higher quality debt.

“They’ve decided quite wisely to firewall that off from the other debt,” said Huston Loke, who heads the structured finance group at DBRS, a debt rating agency in Toronto. “That’s the portion that everyone globally has the biggest question marks around.”

Most debt will be transformed into medium terms notes that will probably mature in five to seven years, Purdy Crawford, the Toronto lawyer who coordinated the negotiations, said in a conference call. That debt will be managed by one of two trusts.

To guarantee liquidity in the market for the restructured paper, several dealers have agreed to provide about 12 billion Canadian dollars to cover margin calls on the notes. Mr. Crawford declined to identify the firms or even to say how many were participating.

Five of six major banks indicated that they might add about 2 billion Canadian dollars to that fund, Mr. Crawford added. If those banks do not ultimately come through, however, Mr. Crawford said that another, non-Canadian financial institution will cover that amount in a contingency plan. He declined to identify the backup financier.

“It will be good paper,” Mr. Crawford said, after indicating that most owners of the restructured debt would probably be repaid if they held it until maturity. The agreement followed the first lawsuits by holders of the paper against dealers as well as threats of more litigation. If the agreement is approved, debt holders will be required to waive their right to sue.

Two ratings agencies, which remain undisclosed, will rate the debt, which was previously only valued by DBRS. As part of that process, Mr. Loke said, investors will be given a detailed breakdown of their debt’s structure. Previously, they were offered general guidance and descriptions from the ratings agency.

“The lesson everyone is taking away from this is that disclosure is very important,” Mr. Loke said.

The Caisse de dépôt et placement du Québec, the large pension fund that is a major holder of the paper and a participant in the talks, said in a statement that it was “very satisfied” with the agreement. The deal requires approval from debt holders, various government agencies and departments. It is not expected to close until March.