UPDATE 2-Volatility, scrutiny cited for Canada ABCP delay
(Adds comments from chairman Purdy Crawford)
By Lynne Olver
TORONTO, Oct 20 (Reuters) - Market volatility has helped to delay the overhaul of Canada's nonbank asset-backed commercial paper market by a month, but the restructuring should be complete by the end of November, the committee of large investors driving the process said on Monday.
Volatility in global markets, the large number of participants involved, and documentation details are all causing the restructuring to take longer than expected, the committee said.
Concerns related to market volatility have distracted and slowed down some of the participants, and most of them have also become more risk-averse, said Purdy Crawford, a senior corporate lawyer acting as chairman of the committee.
"They're looking at our documentation more carefully than they otherwise might," Crawford told Reuters.
"That takes time to work your way through, unfortunately and I'm frustrated about that. I'm sure we'll close, but I'm embarrassed about the delay."
In September, the Supreme Court of Canada declined to hear a legal challenge to the proposed market restructuring, and the investors' committee had planned to complete the complex fix-it plan by the end of October.
The restructuring covers short-term debt securities that were worth C$32 billion before concerns over U.S. credit quality caused a market spasm in August 2007.
The plan is designed to enable investors to eventually recover their money through special reimbursement programs, or by holding or selling the new restructured notes they will receive.
The effort has been bedeviled by numerous delays and extensions, but many retail investors have already been compensated.
More than 600 retail investors have received C$319.8 million in relief from seven dealers that sold the investments, and another 1,776 customers are due to receive C$177.4 million when the restructuring is complete, according to a report published on Friday by the Investment Industry Regulatory Organization of Canada.
In the nonbank ABCP market, mostly small structured-finance companies such as Coventree Inc COF.TO set up trusts that issued commercial paper to large institutions and corporations looking to park cash for short periods. The paper was "backed" by longer-term assets such as receivables and mortgages, as well as more complex credit derivatives. The trusts also had unique "liquidity agreements," mainly with foreign banks, that failed to ease the August 2007 crunch.
National Bank of Canada's (NA.TO) National Bank Financial unit created three of the 22 third-party trusts that issued ABCP. The bank bought back the investments from retail clients in the summer of 2007.
Various Canadian banks and brokerages acted as ABCP distribution agents, and independent dealer Canaccord Capital Inc CCI.TO sold the paper to hundreds of its retail clients.
But none of the investment firms that sold nonbank ABCP did due diligence on the product, and those due diligence processes are "generally inadequate" anyway, IIROC said in its report.
Some firms said they did not distinguish between bank-sponsored ABCP and nonbank ABCP, and most said they relied heavily on a credit rating of R-1 (high) from Toronto-based agency DBRS, according to the report.
"The market made no distinction between bank-sponsored programs based on traditional assets and third-party ABCP programs using structured financial products," concluded IIROC, a self-regulatory organization of investment dealers.
About 1 percent of the paper found its way into the retail distribution chain in "isolated pockets," IIROC said. The product's credit rating and slightly higher yield were the big focus, rather than its structure, underlying assets or risk, IIROC said.
It has proposed new guidelines on due diligence, product transparency, conflicts of interest and credit ratings. ($1=$1.19 Canadian) (Reporting by Lynne Olver; editing by Rob Wilson)
