TSXminer
Well it looks like the craps going to hit the fan for some of the juniors.
" Nat'lPost: ABCP investors could loss half their money
$35B In Non-Bank Paper; Many Exposed To Risky Trade In Derivatives
John Greenwood, Financial Post
Published: Wednesday, September 05, 2007
Owners of billions of dollars of troubled asset-backed commercial paper issued in Canada could lose as much as half of their money because of poorly disclosed exposure to derivatives trades, industry observers are warning.
The vast majority of about $35-billion of non-bank ABCP is backed by risky bets on credit default rates that are now so far underwater that investors could be looking at losses as high as 50 on the dollar, said Edward Devlin, Canadian portfolio manager for highly respected California-based bond fund manager Pacific Investment Management Co. LLC( PIMCO.)
"You've got to think people are not going to be pleased about that," he said in an interview.
Commercial-paper markets around the globe have been struggling with fallout from the subprime mortgage crisis in the United States, but the situation is worst in Canada.
"It's the one country where people couldn't get their money back," Mr. Devlin said. "There's a whole group of people who bought commercial paper [thinking it was liquid] and now they find they can't get their money back."
Holders range from such mining companies as Cameco Corp. and Redcorp Ventures Ltd. to the Ontario Teachers' Pension Plan.
"A lot of these issuers of commercial paper leveraged themselves, so if their prices went down marginally their losses were amplified," said an analyst who asked not to be named, but who also said he thought the derivative exposure could lead to massive losses. "That's a huge issue right now."
The market in this country for non-bank ABCP seized up in early August, triggering a string of warnings of potential defaults from Dominion Bond Rating Service Ltd.
With the specter of massive losses ahead, a group of banks led by Caisse de depot et placement du Quebec came forward with a rescue plan that called for the entire $35-billion market to be converted to longer-term debt, with maturities stretching out as much as eight years.
The idea behind the so-called Montreal proposal was to give the markets a chance to return to normal so holders could recoup their investments.
But now many insiders predict the Montreal proposal will be harder to implement than many expected because of the derivative exposure of many of the issuers. According to Mr. Devlin, about two-thirds of the $35-billion market is backed by derivatives such as credit-default swaps. "They're leveraged up 10 times and leveraged again," he said. "There is an imprudent amount of leverage."
Issuers were able to do that because of unique aspects of the Canadian sector.
For instance, investors did not seem bothered by the fact that only one rating agency was willing to give opinions on nonbank commercial paper. Another aspect is the lack of disclosure regarding specific assets underlying the paper.
"It's a bit of a black box," said Mr. Devlin.
When the market started off in the late 1980s, ABCP was typically backed by various debt obligations, credit card obligations, industrial equipment leases and mortgages. But over the last few years issuers, particularly in Canada, have been loading up on more arcane derivatives such as collateralized debt obligations based on credit default swaps. As a result of the ongoing problems in global credit markets, many of those investments would be well into the red if they were to be sold today.
"The [non-bank] issuers are the ones that are the real black eye on the market," Mr. Devlin said.
Meanwhile, spreads on commercial paper are widening around the world as issuers try to attract buyers. Yesterday the London Interbank Offered Rate, the rate at which banks lend money to each other, jumped to an 8 1/2-year high.
Unlike the non-bank market in Canada, bank-sponsored ABCP continues to turn over, though with difficulty. "I don't think anyone believed it would be this tough," said one analyst.
Non-bank commercial paper is held by mostly Canadian companies as well as government organizations. The National Bank of Canada and the Caisse -- both major proponents of the Montreal Proposal -- are believed to be the biggest holders.
© National Post 2007 "
trade15
