Canada Agrees to Back C$32 Billion Debt Plan (Update3)
By Doug Alexander and Theophilos Argitis
Dec. 19 (Bloomberg) -- The Canadian government agreed to help backstop a C$32 billion ($26.2 billion) restructuring plan for insolvent commercial paper, increasing the likelihood that the debt swap will be completed after 16 months of negotiations.
The federal government, along with the provinces of Ontario and Quebec, will provide financial guarantees to support the restructuring plan, Finance Minister Jim Flaherty said in a statement today on the department’s Web site. The province of Alberta also agreed to provide support.
“Given where the current state of the whole economy is, I think it’s responsible that governments have stepped up,” said Ken McCagherty, chief executive officer of Calgary-based West Energy Ltd., which invested C$30 million in the short-term debt. “This is an issue that needs to be resolved.”
The government support may keep the restructuring plan from unraveling after Deutsche Bank AG, Citigroup Inc. and other non- Canadian banks threatened yesterday to walk away from the deal if it doesn’t close today.
A committee of 17 institutions, including National Bank of Canada, Canaccord Capital Inc. and Caisse de Depot et Placement du Quebec, said it needed C$9.5 billion in further guarantees from “external sources” to complete the plan.
“This means we should be closing without hesitation,” said Colin Kilgour, a Toronto-based consultant who advises investors on asset-backed commercial paper. “This deal should get done, and it should get done soon.”
Not Even Close
Alberta agreed to contribute to the federal plan to ensure “Alberta investors don’t suffer significant losses,” finance ministry spokesman Bart Johnson said in a telephone interview.
The total amount being discussed is “not even close” to the C$9.5 billion the committee said it needs, Johnson said, declining to elaborate.
Individual investors and companies including Sherritt International Corp. and airline owner Transat A.T. Inc. have been waiting to recover some of their investments in debt that hasn’t traded since August 2007. Under the plan, the 30- to 90- day commercial paper would be swapped for new notes maturing in about eight years.
“It’s a step in the right direction,” said Francois Laurin, chief financial officer of Transat, which invested about C$144 million in the paper. “It’s a beginning to a solution that hopefully creates a market over the years so we can recover our money at some point.”
Foreign Banks
The non-Canadian banks, which include Bank of America Corp. and HSBC Holdings Plc, agreed last year not to demand collateral tied to the paper while holders worked out a restructuring. Peter Howard, a lawyer who represents the banks, told an Ontario judge yesterday that his clients won’t extend the accord past today. A message left with Howard wasn’t immediately returned.
“Theoretically they could still walk away today, but I would be shocked if they did,” Kilgour said. “They’ve been at this for 16 months and it’s frustrating to have a deal drag out, but if you’re on the two-yard line, put it in the end zone.”
Banks and brokerages that hold some of the debt soared on the Toronto Stock Exchange. National Bank rose C$3.24, or 13 percent, to C$28.86 at 4:10 p.m. trading on the Toronto Stock Exchange, the biggest gain since Nov. 24. Canaccord surged 73 cents, or 22 percent, to C$4.01, the biggest rise since the stock began trading in 2004.
“The market was looking for the possibility that this was going to implode,” Dundee Securities analyst John Aiken said. “It’s heartening that the government is recognizing the issues and taking steps in relatively quick order.”
Judge Colin Campbell granted a request to extend bankruptcy protection for trusts holding the commercial paper until Jan. 16. That doesn’t affect today’s deadline set by the banks on the standstill agreement.
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Last Updated: December 19, 2008 16:41 EST