The Superior Court of Canada approved a restructuring plan for non-bank asset-backed commercial paper (ABCP) this month, saving investment holders, including University of Western Ontario retirement plan members, from a complete loss of their investment.
Under the restructuring agreement, non-bank ABCP notes will be exchanged for long-term notes that have a maturity similar to the underlying assets of the non-bank ABCP, says Martin Belanger, Associate Director, Retirement Plans for the Members of the Academic and Administrative Staff Pension Board.
The restructuring makes the new notes less risky and more transparent, says Belanger.
Because the underlying assets (such as car loans, mortgages and collateralized debt obligations) have maturities that are longer than those of non-bank ABCP, issuers would traditionally be forced to administer other ABCP notes. However, the restructuring process eliminates the problem of an asset-liability mismatch.
Western is expected to receive the new notes this week.
Non-bank ABCP stopped trading in August 2007 because investors were afraid of exposure to subprime mortgages in the United States. At this time, some financial institutions would have been entitled to seize most of the collateral posted by the ABCP conduits. “This would have caused the value of the non-bank ABCP to go down to almost nothing,” he says.
A Pan-Canadian Investors Committee initiated the restructuring plan to salvage as much of the investment value as possible.
As of August 2007, Western pension plan members holding funds exposed to ABCP – those who had Balanced Income, Balanced Growth, Diversified Equity, U.S. Equity Hedged and U.S. Equity Unhedged investments – totaled $26.3 million, or about two per cent of the total plan’s assets.
Western’s redemption restrictions for non-bank ABCP remain in place. This means that when a member makes a redemption from one of the five restricted funds, a percentage (equivalent to the amount of ABCP held in the fund) is held back and exchanged for units of the Liquidating Trust, which holds the illiquid ABCP.
However, Belanger expects the restrictions will be lifted once a market develops for the new notes and members exposed to ABCP will be able to sell their units for 100 per cent of the value. Members holding units of the Liquidating Trust will also be able to sell those securities.
Although efforts have been made to create a market to allow investors to sell their ABCP notes prior to maturity, it is widely anticipated the initial trading price will be much lower than its face value.
“At this time, the expectations are still that investors in non-bank ABCP will receive most of their money if they hold on to those securities until maturity,” Belanger says, adding the securities mature in December 2016.
The ABCP restructuring plan is “the best scenario under the circumstances,” he says.
“If there had been no restructuring plan, the non-bank ABCP notes would have gone down to zero. Although having a maturity that is almost eight years away will create some challenges, it is expected that a market will eventually develop for these new securities. When a market does, it will allow us to remove the redemption restrictions and go back to business as usual.”
For information about the restructuring plan and how it affects Western pension plan members, visit https://www.uwo.ca/humanresources/.