Restructuring of Canada's Asset Backed Commercial Paper Will Succeed - RBC

Despite rising turmoil in the credit markets, an RBC Capital Markets analyst has reiterated his belief that the proposed restructuring of Canada's seized-up asset backed commercial paper market will succeed.

In a note to clients this morning, Andre-Philippe Hardy said the restructuring of C$32-billion of frozen ABCP will go ahead because all the parties have strong incentives to make it happen.

Mr. Hardy said not only noteholders but also dealers and firms that created the frozen notes would face significant losses if the workout falls apart.

"While the risk of failure will remain until all parties have signed on the bottom line, we continue to view a restructuring as the most likely outcome," he said.

Mr. Hardy singles out National Bank of Canada as one player with a lot on the line. National, which holds C$2.2-billion of notes, has already written down the value of its investment by 34%.

He estimates that a failure of the so-called Montreal Accord would result in pre-tax losses of as much as C$700-million for National, which would take its Tier 1 ratio down to 8.7%.

The market for ABCP not sponsored by the domestic banks froze up in August 2007 as a result of fallout from the subprime mortgage debacle. A group of market participants launched a plan to restructure the paper but 15 months later they have still not succeeded.

The wildcard in the restructuring is a group of foreign banks including Citigroup (C) and Merrill Lynch (MER) who acted as counterparties to credit default swap transactions that underlie the ABCP. Their participation in the deal is critical but some observers worry that they may be too busy trying to survive the credit storm. Mr. Hardy disagrees - they have too much to lose to let the plan fail, he said.