Stock markets in Toronto and New York ended sharply lower on Tuesday as investors moved to the sidelines amid signs of a growing credit crunch and more reluctant consumers.

The S&P/TSX composite index shed 184.83 points to end the day at 13,242.62 — its fourth loss in a row.

Coventree three-month trading

The heavily weighted financial index lost 1.5 per cent as several issuers of specialized debt products signalled that they were having trouble finding financing.

Shares of Toronto-based finance company Coventree Inc. plunged  72 per cent Tuesday as it warned it may face lawsuits — one day after the Canadian financial company said it couldn't find buyers for $250 million of its asset-backed commercial paper.

The shares dropped $6.13 to close at $2.37. On Monday, Coventree said turmoil in the U.S. subprime mortgage market created "unfavourable conditions" in the Canadian market and forced it to extend maturities on $250 million of debt and seek emergency funding on another $700 million.

Coventree is a major issuer of asset-backed commercial paper in Canada, with $16 billion in funding outstanding.

Coventree buys debt from banks and retailers and then repackages it as commercial paper that it sells to the credit market through a variety of trusts. 

"The fear is that some Canadian banks may be on the hook for loans to Coventree," BMO Capital Markets economist Sal Guatieri said in a morning commentary.

Bank stocks came under intense pressure. BMO shares slipped 96 cents to $61.27 — setting a new 52-week low in the process; Royal Bank shares fell 75 cents to $52.  

Coventree not alone

Coventree wasn't the only issuer of asset-backed commercial paper to report funding difficulties.

MMAI-I Trust was also unable to roll over its maturing asset-backed commercial paper to fund the repayment of previously issued notes maturing on Monday.

"MMAI gave notice to request Deutsche Bank to provide liquidity to repay the maturing notes under the liquidity arrangement," said a statement issued Tuesday by National Bank Financial.

"Deutsche Bank notified MMAI that it declined to provide the requested liquidity."

Units of Global Diversified Investment Grade Income Trust, which markets the MMAI-I Trust, plunged by 51 per cent (down $1.70 to $1.60).  

The Dominion Bond Rating Service said Tuesday that 17 issuers of asset-backed commercial paper had requested special liquidity funding as of the close of business Monday, citing market disruption.

Dow tumbles 207 points

The Dow Jones industrial average dropped 207.61 points to close at 13,028.92.

Shares of Wal-Mart and Home Depot — both Dow components — slid by five per cent.

Wal-Mart lowered its profit outlook for the year, saying consumers are being more cautious in their spending. Home Depot said weakness in the U.S. housing market caused quarterly profits to drop.

The subprime mortgage mess in the U.S. was also getting some blame for the sell-off, as Illinois-based Sentinel Management Group, which manages $1.6 billion US in assets, asked for permission to halt investor redemptions.

Sentinel said it was getting so many redemption requests, it would have to sell securities at deep discounts.   

"The market is very, very sensitive at this point, and any news about a potential financial problems is going to affect the way that the market trades," said Scott Fullman, director of investment strategy for I.A. Englander & Co.

"We've been seeing extreme sensitivity in the financials, but also in the consumer stocks and industrials during the session."

 

With files from Associated Press