The National Post has reported:
A group of investors and financial institutions trying to find a way to restructure $33-billion of seized-up asset-backed commercial paper has failed to meet a key deadline for a proposal, setting the stage for a potential legal showdown between frustrated noteholders and investment dealers.
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However, in the four months since the strategy was hammered out, credit markets worldwide have deteriorated to the point that many observers worry the new notes may prove just as illiquid as the ABCP they will replace.
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Sources close to the negotiations said that the Bank of Canada has been pushing the major domestic banks to play a role in the restructuring by supporting the new longer term notes that would replace the ABCP by creating a market and sharing some of the risk. The banks have also been asked to support collateral calls that could be triggered under the terms of the underlying assets. However, they have yet to agree.
The liquidity thing is a valid concern for the investors, but I don’t see why anybody else cares. I’ve been predicting that – presuming that the paper comes out as advertised, with at least the senior tranche consisting of AAA floating rate paper – that the dealers would make out like bandits, 70-bid, par-offered. I can see no compelling reason why the banks should agree, for instance, to call a continuous two-way market with a 50 cent spread, 5-million up. Unless they’re paid.
The banks have been asked to support collateral calls that could be triggered by the underlying assets? Why should they? Who’s paying them?
I suspect that the investors are still living in a never-never land of zero default risk and easy trades that always win. Perhaps six more months of pain is in order.
Update, 2007-12-17: TD has announced:
“TD is willing to consider measures that support attempts to resolve liquidity issues in the financial markets. However, our position has been that it would not be in the best interest of TD shareholders to assume incremental risk for activities in which we were not involved,” said Ed Clark, President and CEO, TD Bank Financial Group.
Following on comments made during its third and fourth quarter of 2007 earnings conference calls, TD Bank Financial Group further reiterated that it does not have any exposure to non-bank sponsored Asset Backed Commercial Paper (ABCP) products covered by the Montreal Accord. This includes holdings within TD Mutual Funds and other money market funds managed by TD Asset Management Inc. TD also noted that it did not distribute any related products to customers through its systems.
The Bank noted that markets for TDBFG-sponsored asset backed commercial paper (ABCP) have continued to perform satisfactorily.
Seems perfectly reasonable to me!
It’s inconceivable that they would ask third parties to his mess to come in and provide any support. Why don’t they focus their persuasion efforts on the counterparties (who have profited the most from this industry) and make them put up the support?
Also, the length of time that this Crawford process is taking is a disaster. In retrospect, they should have released all the legal docs, given people a couple of weeks to read them, and then let each underlying transaction trade freely as a separate security. So investors of a trust with 12 underlying transactions would get a dozen new securities of various maturities and each containing the transaction collateral plus the CDS contract (in the case of CDO assets).
This idea would allow investors who invested in more conservative trusts to avoid getting mixed in with lesser assets. Some of these transactions, from ’04 say, would be all corporate (predominately investment grade) credits, flat structure (vs CDO-squared), with no leverage, and be maturing in ’09. And some of the real traditional securitization assets would have natural liquidity as the assets paid down. If you’re holding this kind of stuff, why would you want to go along with the committee’s plans?
Why don’t they focus their persuasion efforts on the counterparties (who have profited the most from this industry) and make them put up the support?
Why would the counterparties want to do this? I’m sure they’re perfectly willing to stick it to the noteholders; if the counterparties have to take a loss, that should happen only after the noteholders have lost every single dime.
Agreed. But it makes more sense to make a stink about them (e.g. DB, Citi, ML, HSBC) in the press than about the big five Cdn banks.
Without having any inside knowledge of negotiations whatsoever, I suggest that the Bank of Canada is desperate to get the private sector to solve the problem. They can jawbone TD – TD’s merely a big frog in a small pond. They do not have quite so much leverage with the four LCFIs you mentioned.
According to the Financial Times:
The sticking point seems to be … the BoC wants the domestic banks to lend funds so the trusts can meet their margin calls from the LCFIs. In other words, these new funds will be on margin at a rate definitely higher that the LCFIs deemed prudent when selling the packages.
I don’t see how this makes business sense for anybody. Seems to me that the only viable solution is the one that many othernon-bank-sponsored SIVs have taken: sell a vertical slice of the assets to the noteholders and let them deal with it.
[…] Things were looking grim after last week’s hiccup. There are no details on how the margin of the CDSs that have been written will work … the only thing that would make sense to me is that an equity tranche will be issued and paid out of what would otherwise have gone to the senior noteholders. Or, perhaps, the lines from the banks will be more richly rewarded (again, out of the senior noteholders’ hides). But I will report new developments as they are released… […]