Having defied the odds and the skeptics by getting Canada’s big banks to support the restructuring of the $32-billion asset-backed commercial paper market, the next challenge for the restructuring group led by lawyer Purdy Crawford of Toronto is to get unhappy retail investors on board.

“What it hinges on is the retail investors,” says Crawford, chairman of the Pan-Canadian Investors Committee for Third-Party Structured ABCP. “They all have a vote, and there are a lot of them.”

In mid-March, the Ontario Superior Court of Justice granted an application from the Crawford committee to place $32-billion worth of ABCP in creditor protection under the Companies’ Creditors Arrangement Act, a process that Crawford says has the benefit of not requiring government bailouts and will provide stability to the market as the restructuring effort continues.

The committee won court protection just days before the ABCP market was set to reopen, an event that probably would have hammered the value of the paper. The court decision freezes the market until April 16; protection is likely to be extended if the restructuring process requires more time. It is expected that the restructuring plan — to be voted on in April — will give birth to new longer-term notes that will receive investment-grade ratings.

With the market suspended and investors stuck with their ABCP, the committee has been working to reassure investors, recapitalize the market and create a secondary market to build liquidity.

The successful bid for creditor protection was unusual: the credi-tors, rather than the debtors, had sought protection. Essentially, major investors, which include Crown corporations, financial institutions and companies that hold more than $21-billion of the ABCP, pushed the 20 trusts that created the paper into court proceedings.

However, the move will anger some retail investors because, under the plan, players in the ABCP sector such as banks, brokers and rating agency DBRS Ltd. would be granted blanket legal immunity. That would make it much harder for burned investors to sue for any losses.

“They have to be sold on [the plan],” says Crawford. His restructuring committee intends to embark on a cross-country road show at the end of March designed to sell investors on the merits of the plan, he says: “We will be meeting with all kinds of small investors and we have some plans going forward to help with the secondary market over time.”

Under CCAA rules, the plan must be approved by a majority of noteholders that vote at the meeting, as well as noteholders representing at least two-thirds of the total aggregate principal amount of the affected ABCP represented at the meeting. In this process, retail investors are crucial. Although big players hold most of the ABCP, by value, the 1,600-odd retail inves-tors are more numerous and have an equal vote in the ultimate fate of the ABCP market.

Crawford confirms that Bank of Montrealand CIBC will each contribute $300 million to the $14 billion required in backup funding commitments for the restructured ABCP market. Bank of Nova Scotia will contribute $200 million; Royal Bank of Canada, $100 million; and TD Bank Financial Group, $50 million. As well, National Bank of Canada will provide $815 million in liquidity to support the efforts of the proposed restructuring plan.

The last bank to pledge support for the ABCP restructuring was TD, which did not have any financial exposure to the non-bank ABCP market. It agreed to participate only after a number of appeals, including a call from Bank of Canada’s governor Mark Carney.

“TD was asked to play a role, and we’ve agreed on the basis that both the government and the Montreal accord committee indicated our participation is critical to the overall success of the restructuring process,” says Ed Clark, president and CEO of TD. “We have always said that we would be part of a solution if our participation was needed to resolve this issue and did not involve significant risks to our shareholders and customers.”

The bank has stated that its financial support is “not material” to its operations.

“We have been beaten up for going so slow,” says Crawford, who notes the deterioration in credit markets has only made the restructuring process more difficult. “After we had it [done] partly by December, the credit markets had gone to hell. What it might have cost to hedge a $50-million commitment in late December [now costs] probably three times as much today.”

@page_break@This past December, Crawford’s committee was asking the Canadian banks and other parties contributing to the $14-billion standby line of credit to do so for 160 basis points, when the going market rate would have been 250 to 300 bps.

Besides gaining the approval of retail investors, the restructuring hinges upon transforming the short-term ABCP into longer notes. Maturity dates will run as long as nine years.

Investors who are willing to hold their paper for the new, longer terms should recoup much of their value, Crawford says: “What they get if they trade in the market over the next year or two — who knows? It depends on the world markets.” IE