STAFF NEWS & ANALYSIS
Canada Corporate ABCP Holders to Fight New Plan
By - August 21, 2008

A small mining development company is suing Toronto-based credit rating agency DBRS Ltd. over the Canadian asset-backed commercial paper market disruption, the first claim made against DBRS since this $35-billion market seized up nearly a year ago. DBRS was the only agency that rated Canadian asset-backed commercial paper issued by non-bank-sponsored trusts. Last August, in the early days of the credit crisis, investors in the non-bank ABCP market grew concerned about the nature of the assets underlying the notes, and stopped buying new paper. The issuing trusts were unable to pay investors for maturing paper, and the market has been in limbo ever since. Large ABCP market participants, including the trusts, foreign and domestic banks and large institutional investors, developed a complex restructuring plan that has yet to be implemented. Vancouver, B.C.-based miner Silver Standard Resources Inc. filed the claim against DBRS last week in the B.C. Supreme Court. – Financial Post

Dominant Social Theme: Justice grinds on slowly. Everyone has his day in court, even a mining company.

Free-Market Analysis: In fact, what has happened to some ABCP holders is most unfair – and the recent news that the case will make its way to the Canadian Supreme Court, while hopeful on its face, is probably not going to make much difference. The courts in Canada seem woefully un-inclined to help those afflicted with the frozen paper because of the larger ramifications involved. Of course, what is really needed is a discussion over how fiat- banking, and central banking in particular played a role in this ongoing fiasco. That's probably not more likely to happen than a fair hearing about this business.

In fact, it is one thing to file a suit in court and not receive satisfaction. It is another to have a ruling that makes it nearly impossible to achieve any just compensation right from the start. The Canadian courts, thus far, have made it very difficult for some note holders – but not others – to receive satisfaction. The ABCP paper was short-term and sold as guaranteed AAA paper, yet medium-sized holders are being asked to hold on for nine years. That's a horribly long time.

Here's another take on the situation from back in June after the initial decision that followed on the heels of a failed media attempt to win the necessary support for the restructuring plan:

Canadian corporations who claim they were improperly sold non-bank asset backed commercial paper aim to fight a restructuring plan approved on Thursday that limits their rights to sue market participants. The companies said on Friday they will try to get the decision by Ontario Superior Court Justice Colin Campbell overturned. Lawyers for the companies say Campbell went too far when he approved a C$32 billion restructuring plan for the non-bank sponsored ABCP market. The plan basically shuts the door to lawsuits against banks, investment dealers, rating agency DBRS and other parties involved in the market, except for narrowly defined cases of potential fraud. "The main issue is whether these broad releases are appropriate or legal and we are going to appeal it," said Allan Sternberg, whose client, Hy Bloom, has already started a lawsuit against his bank. Sternberg said the Canadian law under which the restructuring would occur is silent on whether the court can expropriate the right to sue. "We say no, it's not within the spirit of the CCAA (Companies Creditors Arrangement Act). You can't expropriate somebody's property like that," he said. -Reuters

This plan, now being litigated against (and deservedly so), has been bubbling for a long time. The powers-that-be tried to persuade the Canadian public in the spring of ‘08 to accept it. The media in Canada painted unwilling corporations as greedy; they were said to be stifling the credit market's ability to move forward if they didn't accept the plan. Pundit after pundit graced Canadian TV screens and newspaper columns with expert advice on why the plan was so important for Canadians to accept. Yet the plan failed to win uniform acceptance – so now it is in the courts, and headed to the Supreme Court of Canada But before this debacle could be heard by the Supreme Court of Canada, this devastating blow was delivered on monday by the Ontario Supreme Court to the legal rights of the disadvantaged corporations and institutions.

The Ontario Court of Appeal has given a green light to the $32-billion restructuring of Canada's frozen third-party asset-backed commercial paper market. In a 3-0 decision, Mr. Justice Robert Blair agreed with a lower-court ruling and found that the proposed plan of arrangement "is fair and reasonable in all the circumstances." … But even the Appeals Court judges acknowledged it is unclear if a market for the new notes will develop. …In their decision the three judges agreed with an earlier ruling by Mr. Justice Colin Campbell that linked the restructuring to "the need to restore confidence in the financial system in Canada." …The major opponents of the workout is a group of companies including drugstore chain Jean Coutu with holdings of about $1-billion of ABCP. With yesterday's decision proponents of the workout are expected to move forward to the next stages, issuing the new notes and paying out to individual retail investors who hold less than $1-million in ABCP. However, the mostly corporate investors who still oppose the restructuring and who are prevented from suing for their losses, unless they can prove outright fraud, can still ask the Supreme Court of Canada for leave to appeal the case. – Financial Post

Will it make a difference? It's not enough that "investors" get their money back fairly soon, but that's probably about all that will happen. Investors have more votes than Canadian junior mining companies after all. And come to think of it, what about firms such as Ivanhoe Mining, Silver Standard Mining and Norsemont Mining? These are solid Canadian mining companies that have just witnessed significant working capital draw-downs – collectively tens of millions of dollars temporarily sitting in purported AAA short-term paper, that turned out to be anything but.

Who replaces their necessary working capital? Who suffers? Do they not have a diminished position in the eyes of their shareholders and yet still have to gain access to the markets for replacement capital to proceed with their operations?

After Thoughts

This is a clear example of how court "justice" can be used to thwart rights and protect those who are the most powerful and thus the most influential. Banks, Investment management Companies and the DBRS are no longer able to be sued by the corporate holders of the worthless paper. No, they are not to be held accountable for their involvement. Why? Good question. One that is most easily answered by recognizing the simple fact that the media blitz to persuade the public to accept the long-term plan was a failure. And when the powers-that-be fail with in their attempt to claim victory over the public's minds, they inevitably turn to force as the final means to protect their interests. Does anyone doubt the obvious pattern displayed here. In normal circumstances, the market itself would deal with those who created and marketed the failed instruments. But now the courts have stepped in and made a series of unfair judgments that pit holders against each other and protect those who are least deserving of it. And Canada's Supreme Court does not look to favorably on over-ruling a provincial supreme court – especially when it has ruled unanimously.

Increasingly, Western society is tilting in a dangerous direction. If business cannot find impartial justice and honest opinions then the marketplace itself is jeopardized. Perhaps a closer look at the fiat money magicians who created this mess is warranted. Not likely to happen any time soon in Canada.

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