While many U.S. investors were rocked this year by the lock-down on auction rate securities, investors in Canada were caught up in a similar drama following the freeze of some $32 billion (Canadian) in asset-backed commercial paper – a scenario caused in part by exposure to subprime mortgages in the U.S.
The Supreme Court of Canada declined to hear a legal challenge to a proposed restructuring of the country’s nonbank asset-backed commercial paper market, ending months of uncertainty and clearing the way for an unprecedented overhaul to go ahead, according to Reuters.
The restructuring plan covers short-term debt securities that were worth C$32 billion ($30.5 billion) before concerns over U.S. credit quality caused a market spasm in August 2007.
The court decision will enable investors to eventually start recovering some of their money, and the group of large investors that started crafting the workout plan a year ago said it will try to implement the plan in October.
Corporations that owned some of the commercial paper had fought the plan, but the Supreme Court of Canada turned down their appeal request.
In the nonbank ABCP market, small structured-finance companies set up trusts that issued commercial paper to large institutional investors and corporations looking to park cash for short periods. The paper was “backed” by longer-term assets such as receivables, mortgages and other loans.
Corporate investors owning more than C$600 million of the paper complained that the proposed restructuring plan, designed to help recover some of their money, was full of uncertainty and would unfairly prevent them from suing banks and brokerages, except in cases of fraud.
Unlike in the U.S., where settlements with sellers of auction rates were the result of extreme pressure applied by state attorney general investigations in New York, Massachusetts and Missouri, Canada’s asset-backed restructuring followed a consolidated piece of litigation that rapidly moved through both the country’s insolvency regime as well as the federal court system.