Asset-backed commercial paper's long road back

A restructuring deal reached in January will help Canadian investors in asset-backed commercial paper get at least some of their cash back. But what is ABCP, and what's its connection to the financial meltdown?

A deal on Monday to wrap up what’s believed to be the most complicated restructuring in Canadian financial history involves an equally complicated and arcane form of investment.

What is ABCP?

Asset-backed commercial paper, or ABCP, is short-term corporate debt made up of a bundle of loans like mortgages, credit card receivables and car loans. This debt is resold to other investors, taking the original loans off the books of the company that first issued them. It can lead to lower lending standards, because the originator of the loans doesn't have to worry about collecting.

What happened to Canadian ABCP?  

The market for about $32-billion worth of this debt froze completely in August 2007. Most is held by pension funds and other big institutional investors such as National Bank of Canada and the Caisse de dépôt et placement du Québec, that province's biggest pension-fund manager.

A group of investors trying to unfreeze $32 billion in asset-backed commercial paper investments says the Superior Court of Ontario has approved the restructuring agreement and many smaller investors should begin getting their  money back — perhaps as early as Jan. 16.

"While no one could have predicted the scope and extent of the challenges that we've faced along the way, we continue to believe in the benefits of this restructuring and are pleased that we are arriving at its long-awaited and successful conclusion," said  Purdy Crawford, chairman of the investors committee.
Purdy Crawford help negotiate the restructuring deals ((CBC))

Asset-backed commercial paper, or ABCP, is even harder to understand than it is to say. But to the extent its troubles warned of bigger problems to the world’s financial health — it was an early canary in the coal mine.

It’s basically short-term debt  made up of a bundle of loans like mortgages.

The people and companies that invest in this debt are supposed to get cash back as the underlying loans are repaid.

In August 2007, however, it became clear that some of this debt might have exposure to the U.S. subprime mortgage market.

ABCP time line

August 2007

Selling off the paper could have resulted in huge losses, so the major investors agree to the Montreal Accord, which stopped the liquidation and bought some time.

September 2007

Purdy Crawford, a high-profile Bay Street figure, is hired to restructure the frozen ABCP.

December 2007

The Pan-Canadian Investors Committee reaches agreement in principle

June 2008

Ontario Superior Court approves restructuring.

August 2008  

Ontario Court of Appeal turns down a bid  to scuttle the deal. Angry investors appeal to the Supreme Court of Canada

September 2008

Supreme Court declines to hear the appeal.

December 2008

Plan is renegotiated, again.

January 2009

Court approves the final ABCP restructuring.

In other words, it might not be worth as much as investors believed, and in fact was probably worth a whole lot less.

As a result, nobody wanted to buy ABCP — and that meant nobody could sell.

The market froze.

Canadian investors who believed they could get their money out of ABCP when it matured in a year couldn’t get any cash at all.  They were particularly angry, since ABCP has been sold to them as a safe investment.

Even sophisticated players were on the hook for large financial losses because of their holdings. Last August, the City of Hamilton estimated it could lose $14 million on holdings of $97 million in commercial paper.

The Pan-Canadian Investors Committee for Third-Party Structured ABCP says larger institutional investors will receive new restructured notes that will mature in several years.

Most small investors will be fully refunded by the securities firms that sold them the ABCP.

Still, there is bound to be some unhappiness.

It’s believed the new notes will trade at a significant discount. Furthermore, the deal rules out lawsuits by people who feel they were sold the paper under false pretences.

An estimated 99 per cent of the notes are held by institutional investors, such as pensions and businesses, and about $400 million is held by an estimated 1,800 individual retail accounts.