Debt vultures await desperate sellers
BOYD ERMAN
Sunday, September 02, 2007
The vultures are circling Canada's asset-backed commercial paper market, seeking to snap up securities on the cheap from distressed sellers.
Toronto-based Cerberus Capital Management LP sent in a team of distressed debt specialists as the Canadian market for asset-backed commercial paper (ABCP) – very short-term securities backed by assets such as credit card loans and mortgages – imploded amid concern that some of the paper was backed by U.S. subprime mortgages that are going sour, sources said.
Cerberus isn't alone as distressed debt experts Fortress Investment Group LLC of New York and Brookfield Asset Management Inc. of Toronto are also looking to buy the paper at a substantial discount to its “par” value of 100 cents on the dollar, said people familiar with the market. At least one big U.S.-based brokerage firm is also looking to make a market in the securities. More than $30-billion of this paper is outstanding.
So far, no trades are taking place because the market is locked up in the wake of the so-called Montreal proposal brokered by the Caisse de dépôt et placement du Québec, which created a stand-still in the ABCP market while players look for a way to minimize losses. Big holders of the paper don't want any trades to go through at less than 100 cents on the dollar because then all the securities they hold will have to be revalued at a lower level in a so-called “mark to market,” which could lead to substantial paper losses for holders.
“The paper is available, but only at par,” said one senior brokerage executive.
So far, bids have been well below that, said one person at a company that owns some of the paper and is considering its options. Two weeks ago, when the crisis in the market was at its worst, potential buyers were offering as little as 75 cents on the dollar, he said, though the bids have improved in recent days.
Frustration is growing among some small companies holding the commercial paper.
The worst off are junior resource companies, which were advised by banks to park their cash in these supposedly low-risk, liquid holdings, rather than a traditional low-interest savings account.
Many of these companies now need access to their capital to pay for mine development or meet payroll, and are hampered by the fact that banks have offered only limited support. One mining financier said banks are willing to extend lines of credit equal to only 50 per cent of ABCP holdings.
“For companies that need access to their cash quickly, the pace of this workout is incredibly frustrating, but no one is selling just yet,” said one banker who works with a number of mining companies that own ABCP. Another financier said the banks that advised buying ABCP, including HSBC Bank Canada, are now cutting deals with clients on a case-by-case basis, which creates its own set of concerns.
As for distressed-debt investors, if they can buy at a deep-enough discount, they can absorb any losses from subprime loans gone bad and still make a profit by holding the debt to maturity.
There are a couple of potential pools of willing sellers if and when the market opens up. Many money market mutual funds may have to sell if the ABCP is converted into three- or five-year bonds, one of the potential outcomes under consideration. Money market funds are not allowed to hold debt with such long maturities.
With files from Andrew Willis
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