Asset-backed commercial paper's long road back

A deal on Monday to wrap up whats believed to be the most complicated restructuring in Canadian financial history involves an equally complicated and arcane form of investment.

A group of investors trying to unfreeze $32 billion in asset-backed commercial paper investments says the Superior Court of Ontario has approved the restructuring agreement and many smaller investors should begin getting their money back perhaps as early as Jan. 16.

"While no one could have predicted the scope and extent of the challenges that we've faced along the way, we continue to believe in the benefits of this restructuring and are pleased that we are arriving at its long-awaited and successful conclusion," said Purdy Crawford,chairman of the investors committee.

Asset-backed commercial paper, or ABCP, is even harder to understand than it is to say. But to the extent its troubles warned of bigger problems to the worlds financial health it was an early canary in the coal mine.

Its basically short-term debt made up of a bundle of loans like mortgages.

The people and companies that invest in this debt are supposed to get cash back as the underlying loans are repaid.

In August 2007, however, it became clear that some of this debt might have exposure to the U.S. subprime mortgage market.

In other words, it might not be worth as much as investors believed, andin fact was probably worth a whole lot less.

As a result, nobody wanted to buy ABCP and that meant nobody could sell.

The market froze.

Canadian investors who believed they could get their money out of ABCP when it matured in a year couldnt get any cash at all. They were particularly angry, since ABCP has been sold to them as a safe investment.

Even sophisticated players were on the hook for large financial losses because of their holdings. Last August, the City of Hamilton estimated it could lose $14 million on holdings of $97 million in commercial paper.

The Pan-Canadian Investors Committee for Third-Party Structured ABCP says larger institutional investors will receive new restructured notes that will mature in several years.

Most small investors will be fully refunded by the securities firms that sold them the ABCP.

Still, there is bound to be some unhappiness.

Its believed the new notes will trade at a significant discount. Furthermore, the deal rules out lawsuits by people who feel they were sold the paper under false pretences.

An estimated 99 per cent of the notes are held by institutional investors, such as pensions and businesses, and about $400 million is held by an estimated 1,800 individual retail accounts.