An ABCP primer
Globe and Mail Update
April 3, 2008 at 8:18 AM EDT
What is ABCP?
Asset-backed commercial paper is 30-day and 60-day notes that paid investors interest generated by bundles of mortgages, car loans, derivatives and other assets pooled in special vehicles called conduits or trusts.
Why did ABCP become popular with investors?
ABCP offered good returns at a time when central banks were slashing interest rates. The investment was also highly rated and sold by some of the world's biggest banks. Last year, ABCP accounted for 30 per cent of Canada's $360-billion short-term debt market.
Who holds frozen ABCP?
About 1,400 Canaccord Capital Inc. clients collectively hold $269-million of the frozen commercial paper in their accounts. There are also hundreds of other individual investors who bought the paper from other sellers, bringing the total to at least 1,800 holders. The rest is held by companies, Crown corporations, pension funds, institutional investors and banks.
Why is Canada's ABCP frozen?
The ABCP sector was swept up by the crisis in U.S. subprime mortgages in August. That's when it was revealed that an unknown amount of ABCP was tied to dodgy U.S. housing loans. Buyers disappeared and the market froze. To stop the trusts that issued the paper from going into default and being liquidated, a group of major financial players, led by the Caisse de dépôt et placement du Québec, called for a standstill in the market to avoid a meltdown and seek a solution.
What are they waiting for?
Purdy Crawford and his committee have crafted a plan to exchange the short-term notes for ones that mature in as much as nine years. But a majority of investors must approve the plan when they vote on April 25. That is why Mr. Crawford is holding meetings with investors in major cities.
Will investors get their money back?
Under the restructuring plan, investors who hold the notes until they mature - up to nine years - will receive much if not all of their money back. Many investors say they can't wait that long, and the committee hopes an over-the-counter market will develop so investors can trade their shares soon after the plan is in place. However, investors who have to sell in the short term will almost certainly lose money.
What is the frozen paper's market value?
There have been no recent disclosed trades in the paper, so nobody is sure.
Notes that are backed by bad U.S. mortgages will be worth less than those backed by solid assets. An RBC Dominion Securities analyst recently said the overall market has lost about 40 per cent of its value. However, if the restructuring fails, many of the assets will be seized by creditors and sold at depressed prices, leaving little or nothing for investors who own the paper.
Determining exactly how much of their money investors in this paper will recoup is somewhat more complicated. That's because the restructuring plan for the market involves dividing it up into three types of new investments that will each have different values, because some will be riskier than others, and each investor will get a different mix of the new paper depending on what types of frozen paper they held.
Who's paying for the Purdy Crawford committee and its work?
Investors. It will cost between $80-million and $100-million to pay the lawyers, financial advisers, the court-appointed monitor and the rating agency.
http://www.theglobeandmail.com/servlet/story/RTGAM.20080403.wabcpprimer0403/BNStory/Business/
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People thought they were getting a secure investment. The proposal effectively has their money mature at par value in 10 years. One other idea floating around is everyone getting 60 cents on the dollar from a vulture fund. Pretty ugly situation for investors.
Globe and Mail Update
April 3, 2008 at 8:18 AM EDT
What is ABCP?
Asset-backed commercial paper is 30-day and 60-day notes that paid investors interest generated by bundles of mortgages, car loans, derivatives and other assets pooled in special vehicles called conduits or trusts.
Why did ABCP become popular with investors?
ABCP offered good returns at a time when central banks were slashing interest rates. The investment was also highly rated and sold by some of the world's biggest banks. Last year, ABCP accounted for 30 per cent of Canada's $360-billion short-term debt market.
Who holds frozen ABCP?
About 1,400 Canaccord Capital Inc. clients collectively hold $269-million of the frozen commercial paper in their accounts. There are also hundreds of other individual investors who bought the paper from other sellers, bringing the total to at least 1,800 holders. The rest is held by companies, Crown corporations, pension funds, institutional investors and banks.
Why is Canada's ABCP frozen?
The ABCP sector was swept up by the crisis in U.S. subprime mortgages in August. That's when it was revealed that an unknown amount of ABCP was tied to dodgy U.S. housing loans. Buyers disappeared and the market froze. To stop the trusts that issued the paper from going into default and being liquidated, a group of major financial players, led by the Caisse de dépôt et placement du Québec, called for a standstill in the market to avoid a meltdown and seek a solution.
What are they waiting for?
Purdy Crawford and his committee have crafted a plan to exchange the short-term notes for ones that mature in as much as nine years. But a majority of investors must approve the plan when they vote on April 25. That is why Mr. Crawford is holding meetings with investors in major cities.
Will investors get their money back?
Under the restructuring plan, investors who hold the notes until they mature - up to nine years - will receive much if not all of their money back. Many investors say they can't wait that long, and the committee hopes an over-the-counter market will develop so investors can trade their shares soon after the plan is in place. However, investors who have to sell in the short term will almost certainly lose money.
What is the frozen paper's market value?
There have been no recent disclosed trades in the paper, so nobody is sure.
Notes that are backed by bad U.S. mortgages will be worth less than those backed by solid assets. An RBC Dominion Securities analyst recently said the overall market has lost about 40 per cent of its value. However, if the restructuring fails, many of the assets will be seized by creditors and sold at depressed prices, leaving little or nothing for investors who own the paper.
Determining exactly how much of their money investors in this paper will recoup is somewhat more complicated. That's because the restructuring plan for the market involves dividing it up into three types of new investments that will each have different values, because some will be riskier than others, and each investor will get a different mix of the new paper depending on what types of frozen paper they held.
Who's paying for the Purdy Crawford committee and its work?
Investors. It will cost between $80-million and $100-million to pay the lawyers, financial advisers, the court-appointed monitor and the rating agency.
http://www.theglobeandmail.com/servlet/story/RTGAM.20080403.wabcpprimer0403/BNStory/Business/
.....................................
People thought they were getting a secure investment. The proposal effectively has their money mature at par value in 10 years. One other idea floating around is everyone getting 60 cents on the dollar from a vulture fund. Pretty ugly situation for investors.
