Disgruntled investors lose Ontario court bid in ABCP meltdown

Disgruntled investors, who bought asset-backed financial instruments, will need to go to the Supreme Court of Canada if they still want to scuttle an agreement in one of the country's largest financial meltdowns ever.

Disgruntled investors, who bought asset-backed financial instruments, will need to go to the Supreme Court of Canada if they still want to scuttle an agreement in one of the country's largest financial meltdowns ever.

On Monday, the Ontario Court of Appeal turned down a bid by the investors to scuttle a 2007 deal concerning asset-backed commercial paper (ABCP) investments.

The Ontario court said in Monday's decision that the agreement worked out between mainly larger investors last year can proceed.

"We ought not to interfere with [the] decision that the plan is fair and reasonable in all the circumstances," the three-judge panel said.

So, the corporate investors, including drug store group Jean Coutu Inc., need to choose between accepting a rescue deal worked out last year by industrial heavyweight Purdy Crawford or continuing their fight to Canada's highest court.

Lawyer Allan Sternberg of Ricketts Harris LLP told the Canadian Press that he will consult his clients before deciding whether to go to the Supreme Court.

Investor squeeze

Purdy Crawford worked out an agreement last year with larger financial companies in the ABCP situation. ((CBC))
These investors are part of a group of individuals and institutions holding more than $32 billion in Canadian financial paper that they have not been able to sell since last August.

They had invested in what they thought were safe securities, akin to guaranteed investment certificates. 

Instead, they hold a mountain of commercial paper that they could possibly sell now for pennies-on-a-dollar or hold on to for years in order to get more of their cash back.

The angry investors wanted the right to sue companies that sold them the commercial paper.  But, as part of Crawford's rescue deal, investors waived the right to go after companies that sold the investments.

On Monday, Crawford said in a release that the restructuring deal should close Sept. 30 if there are no further appeals.

"Our committee is now in a position to put the final steps in place to complete the restructuring plan and noteholders can look forward to the issuance of new notes and the establishment of a liquid market for them," he said in the release. 

Complex history

For the past 20 years, companies have been bundling together smaller loans of a similar type — for example, car loans — into a larger amount of debt.  Then these firms sold off pieces of this financial pool to big and small investors.

The people and companies that sunk their money in these instruments were supposed to get cash back as the underlying loans were repaid.

Unfortunately, in August 2007, the companies that controlled the financial paper, the biggest in this country being Coventree Inc., could not find buyers to finance these loan pools. 

So, in order to avoid the huge problems faced in the United States, a group of Canadian companies asked Crawford, former head of Imasco Inc., to hammer out a deal to allow investors to recoup some of their money.

In reaching that deal, however, some investors believed they were not being treated fairly, a concern that led to their court case.

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


  • Larger investors are mainly behind the bid to scuttle a 2007 deal concerning asset-backed commercial paper (ABCP) investments. There is not a large number of small investors involved in the bid, as originally reported.
    Aug 18, 2008 7:57 PM ET

With files from the Canadian Press