VZCZCXRO9634
PP RUEHGA RUEHHA RUEHQU RUEHVC
DE RUEHON #0081/01 0791752
ZNR UUUUU ZZH
P 191752Z MAR 08
FM AMCONSUL TORONTO
TO RUEHC/SECSTATE WASHDC PRIORITY 2399
INFO RUCNCAN/ALCAN COLLECTIVE
RUEHLO/AMEMBASSY LONDON 0050
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 02 TORONTO 000081 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT PASS USTR FOR MELLE, MENDENHALL, SULLIVAN 
TREASURY FOR INTERNATIONAL AFFAIRS (TRAN) 
COMMERCE FOR 4320/ITA/MAC/WH/ONIA (WORD) 
 
E.O. 12958: N/A 
TAGS: EFIN EINV ETRD PGOV CA
SUBJECT: Canadian ABCP Market Under Bankruptcy Protection 
 
REF:  (A) Toronto 66 (B) 07 Toronto 430 (C) 07 Toronto 422 
 
Sensitive But Unclassified - Please protect accordingly. 
 
¶1. (SBU) Summary:  On March 17, an Ontario Superior Court Judge 
agreed to convert 20 Canadian trusts, which had issued C$33 billion 
in non-bank sponsored asset-backed commercial paper (ABCP), into 
corporations and to protect them from notices, lawsuits, and other 
claims under the Companies' Creditors Arrangement Act (CCAA) until 
at least April 16.  To date, it is unclear where the assets 
underlying Canada's ABCP physically lie -- whether in Canada or the 
U.S.  Analysts estimate the current average value of non-bank ABCP 
at about 60% of their pre-August 2007 financial crisis value of C$33 
billion.  The expert committee working to restructure the non-bank 
ABCP market has not yet unveiled detailed terms of its restructuring 
plan designed to convert the short-term asset-backed notes into 
longer-term bonds, though investors will reportedly be asked to vote 
on the plan by the end of April.  Canadian investors, protected by 
the early freeze of the non-bank ABCP market and a commodity-heavy 
national stock exchange (TSX), have so far been spared some of the 
visible turbulence of the U.S. financial markets, but even without a 
sub-prime mortgage crisis of their own, some significant Canadian 
investors (including federal and provincial pension funds) may face 
stormy seas when the non-bank ABCP market is unfrozen.  End Summary. 
 
 
--------------------- 
Bankruptcy Protection 
--------------------- 
 
¶2. (SBU) The non-bank ABCP market has been frozen since last August. 
 On March 17, in an unprecedented move, an Ontario Superior Court 
Judge agreed to convert 20 Canadian trusts, which had issued C$33 
billion in non-bank sponsored (third party) asset-backed commercial 
paper (ABCP), into corporations and to protect them from notices, 
lawsuits, and other potential claims under the Companies' Creditors 
Arrangement Act (CCAA) until at least April 16.  The court 
protection plan reportedly has the backing of Bank of Canada 
governor Mark Carney and federal Finance Minister Jim Flaherty. 
 
--------------------------------------- 
Underlying ABCP Assets Remain Undefined 
--------------------------------------- 
 
¶3. (SBU) The ABCP marketplace has remained opaque because Canadian 
federal or provincial governments impose few transparency 
requirements on trusts, which originally issued the investment 
vehicles, or on the non-publicly traded corporations into which 
these trusts have just been converted.  To date, it is unclear what 
specific assets underlie the non-bank or the bank-backed ABCP, 
beyond the fact that they include mortgages (some subprime), car 
loans, and credit card debt, making it difficult to assess what 
portion of those pooled assets is physically located in Canada, the 
U.S., or some other foreign country. 
 
¶4. (SBU) Analysts estimate the current average value of non-bank 
ABCP at about 60% of the pre-August 2007 financial crisis value of 
C$33 billion.  The 20 newly-formed corporations have been downgraded 
by Canada's Dominion Bond Rating Service (DBRS) to a D rating.  The 
Crawford Committee of major investors (led by Toronto lawyer Purdy 
Crawford) who have sought a consensual solution to the crisis 
triggered by the subprime mortgage meltdown since last August, has 
been unable to obtain a second rating by another rating agency. 
However, the underlying assets are considered to still have a better 
than D rating.  The bank-backed ABCP, which continues to freely 
trade and is still fully backed by Canadian financial institutions, 
is reportedly trading at 80% of its C$85 billion pre-August value. 
 
 
----------------------------------------- 
Market Restructuring Plan Coming Together 
----------------------------------------- 
 
¶5. (SBU) On March 17, Toronto Dominion Bank, which had previously 
refused to participate in the market restructuring (ref (A)), 
announced that it agreed to back the C$14 billion back-up credit 
facility for an unspecified amount.  The Crawford committee, which 
has been working to restructure the third party ABCP market since it 
was frozen in August, has not yet unveiled detailed terms of its 
restructuring plan designed to convert the short-term asset-backed 
notes into longer-term bonds.  In December 2007, the committee 
announced a restructuring framework that calls for value 
preservation and market transparency of the underlying assets to 
promote liquidity and market confidence in the new notes or bonds 
that will be issued.  The bonds, which will mature in 7 to 10 years, 
 
TORONTO 00000081  002.2 OF 002 
 
 
are intended to allow investors to recoup much of their money (ref 
(A)).  If the restructuring works, which is the biggest in Canadian 
history, Canada reportedly would be the first country to complete a 
successful market restructuring without a government bailout. 
 
¶6. (SBU) Under the protection of CCAA, the Crawford Committee will 
call a meeting of ABCP investors (note holders of the affected 
trusts) to approve the committee's restructuring plan.  The 
restructuring plan will be mailed out to all note holders and they 
will be given approximately 30 days to vote on the plan.  The plan 
must be approved by a majority of note holders, regardless of the 
size of their holdings, as well as by note holders representing at 
least 66 and 2/3% of the total aggregate principal amount.  Under 
court protection, investors are prohibited from suing any financial 
institution that sold the frozen short-term notes.  Many individual 
investors reportedly hold non-bank ABCP notes; C$21 billion is 
reportedly held by Canada's major financial institutions and federal 
and provincial pension funds. 
 
----------------------- 
Investors Are Concerned 
----------------------- 
 
¶7. (SBU) Critical independent investors are worried that their 
money, which was initially invested in ABCP for short periods of 
time (e.g. three months), will be tied up for too long in the 
restructured bonds, and that they will still lose much of their 
principal investment.  The same investors are concerned that 
Canadian banks may eventually face liquidity crises which could 
prompt them to back out of guaranteeing the market.  Market analysts 
have expressed concern that the crisis may ultimately spread to the 
C$85 billion Canadian bank-sponsored ABCP market.  Canadian Imperial 
Bank of Commerce (CIBC) and Bank of Montreal (BMO) could face 
further billion-dollar write-downs related to investments in U.S. 
subprime mortgages and non-bank ABCP (ref (A)), but analysts believe 
Canada's large banks are basically healthy because they derive most 
of their profits from old-fashioned retail banking, and did not 
issue subprime mortgages in Canada. 
 
----------------------------- 
Spill-over from Bear Stearns? 
----------------------------- 
 
¶8. (SBU) Over the past four years, Bear Stearns issued C$2.65 
billion in Maple bonds in Canada, and investors are worried about 
their risk level (Note: Maple bonds are Canadian-dollar-denominated 
bonds issued in Canada by foreign companies.  End Note).  Bear 
Stearns offered 11 issues of fixed- and floating-rate Canadian 
dollar-denominated debt, which it sold through the brokerage arms of 
the Bank of Nova Scotia and Royal Bank of Canada (RBC).  Vancouver's 
Phillips Hager & North Investment Management, which RBC is in the 
process of taking over in a C$1.36 billion deal, is reportedly the 
largest holder of several of the Bear Stearns Maple bond issues.  As 
the new owner of Bear Stearns, JP Morgan will reportedly guarantee 
the Maple bonds.  Last December, JP Morgan Chase also said it would 
make up any short-fall in the C$14 billion line of credit being put 
together by the Crawford Committee.  It is still unclear to 
investors here whether JP Morgan Chase's weekend acquisition of Bear 
Stearns could reduce the former's liquidity enough to endanger its 
agreement to back the Canadian non-bank ABCP market restructuring. 
 
 
¶9. (SBU) Comment:  Canadian investors, protected by the early freeze 
of the non-bank ABCP market and a commodity-heavy national stock 
exchange (TSX), have so far been spared some of the visible 
turbulence of the U.S. financial markets, but even without a 
sub-prime mortgage crisis of their own, some significant Canadian 
investors (including pension funds) may face stormy seas when the 
non-bank ABCP market is unfrozen.  Canadian banks remain relatively 
healthy - healthy enough that Royal Bank of Canada (RBC) was rumored 
to be a possible buyer for Bear Stearns.  We believe it will be 
difficult for the Canadian federal government to resist investor 
calls for Parliamentary hearings on the non-bank ABCP market in the 
coming weeks.  It is not clear whether the federal government will 
require additional reporting and transparency requirements from 
trusts or non-publicly traded corporations.  End Comment. 
 
NAY