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Article

A Tentative Deal for Restructuring Canadian ABCP

Date

February 28, 2008

AUTHOR(s)

Pierre-Denis Leroux
Marc J. MacMullin
Dean C. Masse
Kevin P. McElcheran
Dirk Rueter


On December 23, 2007, the Pan-Canadian Investors Committee for Third-Party Structured Asset-Backed Commercial Paper (ABCP) announced that an ‘agreement in principle’ had been reached for a restructuring of $33 billion of approximately $35 billion of Canadian ABCP. The repayment of this debt had been frozen pursuant to a standstill created by the ‘Montreal Accord’ as of August 16, 2007.

Pursuant to the agreement, all of the non-bank ABCP issued by 20 trusts will be exchanged for longer-dated notes that will match the maturity of the underlying reference assets in the proposed structure. The plan will divide existing notes into three pools:

  1. ABCP that is supported solely by $3 billion of traditional securitized assets, such as credit card receivables and auto loans;
  2. ABCP that is supported by $26 billion of collateralized debt obligations (CDOs), synthetic assets or a combination of CDOs, synthetic assets and traditional securitized assets; and
  3. ABCP that is tied to risky US sub-prime or home equity loans.

The agreement aims to provide most holders of the non-bank ABCP the opportunity to receive full repayment of principal if they hold the new restructured notes to maturity. Interest, if any, will be paid on the restructured notes to the extent that interest is paid in respect of the underlying pools of assets.

A margin facility of approximately $14 billion will be established to enhance the stability of the largest pool of assets and to fund future margin calls on the assets supporting the largest pool of restructured notes. These notes will also benefit from a restructuring of certain ‘mark to market’ triggers to ‘spread loss’ triggers, which are considered to be more remote and transparent.

The agreement contemplates that measures will be taken to provide liquidity for the restructured notes following completion of the restructuring. The Investors Committee and its advisors anticipate that AAA ratings will be accorded to most of the restructured notes and that such ratings, together with full transparency of the underlying assets supporting these notes, will facilitate trading.

The restructuring plan addresses 20 of the 22 trusts covered by the Montreal Accord. Skeena Capital Trust successfully completed its restructuring on December 20, 2007. This included the redemption of all Skeena notes and repayment to holders of approximately $2.1 billion. With respect to Devonshire Trust, the only other conduit trust covered by the Montreal Accord, it was reported on February 4, 2008 that discussions are continuing for a separate restructuring of that trust.

The implementation of the restructuring is subject to many conditions and necessary consents and approvals. The Investors Committee anticipates that the restructuring will be completed by March 31, 2008.

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