Some of the biggest players in the Canadian financial markets have agreed on a plan to support the struggling commercial paper market.

A group of companies issued a statement Thursday morning saying they had met in Montreal to "work out a solution to the liquidity problem affecting the third party structured finance asset-backed commercial paper market in Canada."

Coventree three-month trading

The liquidity problem was sparked by the announcement Monday that Toronto-based Coventree Inc. was having difficulty finding buyers for the specialized debt products it packages.  

That development sparked wider fears of a credit crunch.

Signatories to the agreement include ABN AMRO, Barclays Capital, the Caisse de dépôt et placement du Québec, Desjardins Group, Deutsche Bank, HSBC, PSP Investments, Merrill Lynch, National Bank and UBS.

The institutional investors said they have the support of investors who hold at least two-thirds of all outstanding third-party asset-backed commercial paper.

The signatories said they expect other market participants to sign on to the agreement "within the next few hours."

Under the plan, the institutions said they had agreed to convert short-term, third-party, asset-backed commercial paper into floating-rate notes. These notes would mature only when the underlying financial assets mature.

"Existing liquidity facilities will therefore not be necessary and will be cancelled, and all outstanding liquidity calls will be revoked," the agreement said.

Coventree Inc. announced early Thursday it had been unable to find buyers for another $790 million of maturing notes it was trying to refinance on Wednesday.

Shares rebound on securing buyers

In an early-morning release, Coventree said it wasn't clear if the failure to sell its asset-backed commercial paper was due to the recent turmoil in the market or if it was due to "technical difficulties" that prevented orders from being processed.

Coventree shares lost more than 80 per cent of their value on Monday and Tuesday, but partially rebounded on Wednesday on signs that it was again able to secure buyers for its debt products. 

Units of Coventree have about $16 billion in outstanding fundings. It has notes that mature every day.  

CIBC World Markets chief economist Jeff Rubin tried to reassure jittery investors that the current credit crunch does not appear to be spreading to the overall economy.

"Despite the huge widening in credit spreads, and the reduction in liquidity in certain areas of the commercial paper market, there has not been a systemic rise in defaults in the Canadian household debt market, or the global corporate debt market, even in the segment financing highly leveraged buyouts," he wrote in a report.

The TSX is down almost 11 per cent from its record high set July 19.