Restructured ABCP Prices Double as Risk Falls: Canada Credit
Bloomberg, 2013-02-21 05:00:01.4 GMT
By Doug Alexander
Feb. 21 (Bloomberg) — The price of debt securities that emerged from the C$32 billion ($31.5 billion) collapse of Canadian asset-backed commercial paper in 2007 have more than doubled in four years to record highs amid improving credit markets and the prospect they may be repaid early.
Companies once stuck with frozen ABCP are being offered more than 88 cents on the dollar for the highest-rated notes that came out of a restructuring of the insolvent short-term debt in January 2009, said Colin Kilgour, whose Toronto-based Kilgour Williams Group advises holders of the debt. That’s up from about 74 cents for the Master Asset Vehicle A1 notes a year ago, and more than double the first trades in 2009.
Appetite for the riskiest debt has surged as central banks keep benchmark borrowing rates low for a fifth year. Notes that emerged out of Canada’s biggest debt default have drawn Moelis & Co., the New York-based investment bank founded by Kenneth Moelis, which is advising a group of U.S. institutional investors pushing to unwind the debt and give original holders the option of early redemptions.
“You’re seeing a reduction of risk, benign credit markets and the prospect of an optional redemption at close to net asset value,” Kilgour said. “You also have right now more buyers than sellers in the market.”
Moelis is in discussions with major holders and the process is ongoing, Andrea Hurst, a spokeswoman for the firm said, without providing details.
Canada’s market for non-bank administered ABCP collapsed in August 2007 on concern that part of the debt was backed by risky U.S. subprime mortgages. More than 100 companies and about 1,765 individuals were stuck with paper that couldn’t trade until a court-ordered plan to convert the debt into longer-term notes was completed 17 months later.
The market of restructured ABCP eligible for trading is about C$11 billion, spread across 39 different types of notes, according to Kilgour. Today’s buyers are predominantly U.S.- based hedge funds, Kilgour said, though Canadian firms are also buying the restructured debt.
GMP Investment Management, a unit of GMP Capital Inc., is one such buyer. The Toronto-based firm has C$400 million of the restructured notes in three of its funds, and is seeking more.
“We’re still buying,” Greg Foss, a managing partner at GMP Investment Management, said in a telephone interview. “We have new money flowing into our funds, we’re buying for them and we’re telling original holders not to sell. It’s still tremendous value.”
The firm’s Canadian ABCP Fund returned 24 percent last year, and is up more than 40 percent since its November 2010 inception, according to Foss.
A tranche of the restructured ABCP that includes lower- rated notes currently yields about 5 percent compared to average global junk bond yields of 6.18 percent.
“Anyone who has purchased notes in the secondary market has made money on this,” Kilgour said. “If you bought early and bought often, you’ve made a ton of money. If you’re still buying, you’re probably still going to make money, but not as much.”
Elsewhere in credit markets, the extra yield investors demand to own the debt of Canadian investment-grade companies rather than the federal government securities widened 1 basis point yesterday to 127, or 1.27 percentage point, according to a Bank of America Merrill Lynch index. Yields were unchanged at 3 percent.
Government bonds were unchanged with the yield on the benchmark 10-year note at 2.02 percent yesterday in Toronto. The price of the 2.75 percent note due in June 2022 rose 3 cents to C$106.19.
In the provincial bond market, the spread to government benchmarks widened 2 basis points to 74 yesterday. Yields rose to 2.69 percent from 2.68 percent.
Canadian corporate bond returns are flat this year, compared with a loss of 1.1 percent for Canadian government bonds, and the 1.3 percent decline in provincial debt, according to Bank of America Merrill Lynch data.
Original ABCP investors have still lost out on what was supposed to be a safe, short-term investment. Investors including Canadian Pacific Railway Ltd., Transat AT Inc. and Entree Gold Inc. that initially bought paper with 30- to 90-day maturities had their investments tied up in notes that mostly mature by 2017, unless they found a buyer.
“The ones that have held since Day 1 have not forgotten the fact that they bought at 100, so while prices are up 24 percent in the last year, they’re still not where they started at,” Kilgour said. “A lot of careers have been ruined, businesses have had difficulty, and nobody’s going to be holding cocktail parties when it gets to par.”
Canadian Pacific said Oct. 24 it had no remaining investment in these long-term notes, after selling the debt earlier in the year. Before the swap, holders including the Ontario government, Magna International Inc. and Epcor Utilities Inc. faced the prospect of getting little or nothing back on their debt.
Caisse de Depot et Placement du Quebec, National Bank of Canada and three other institutional investors that helped negotiate the ABCP restructuring retained C$16.8 billion of the debt, according to court filings. Those firms have said they plan to hold their notes under the agreement.