The Québec Pension Plan (Caisse) and the Ontario Teachers’ Pension Plan are on the hook for some $33 billion in ABCP as are 40 other trustholders, mining companies, paper companies, etc all of which thought they were buying short term easily marketable notes.

This story has been brewing since last summer (see Global Credit Crisis Canadian Style). However bailout plans have now blown up as deadline after deadline for coming up with a solution has been missed.

With the Bank of Montreal Missing Margin Calls earlier this month, what had to happen did: ABCP players to seek bankruptcy protection.

The committee working to untangle $33-billion of frozen commercial paper plans to ask an Ontario judge Monday to grant bankruptcy protection to the 20 trusts that issued the paper, as it works to restructure them.

Investors ranging from major corporations to provincial and territorial governments and private individuals have been stuck holding the paper since last August, when the U.S. subprime mortgage crisis tossed financial markets into a tailspin, causing the market for Canadian third-party asset-backed commercial paper to come to a screeching halt.

Three days after it nosedived, a group of major players, led by the Caisse de dépôt et placement du Québec, announced a plan to restructure the market. It involved converting the short-term paper into longer-term debt. To give the group time to hammer out the details and put the plan in place, the players agreed to a standstill period that essentially froze the market.

The committee, which has missed self-imposed deadlines, failed to unveil its final plan to investors yesterday, even though an agreement that was helping to keep the market frozen was to expire at midnight. A committee spokesman said they remained confident that the market would not descend into chaos.

The committee plans to file an application in Ontario Superior Court to put each of the 20 trusts under the protection of the Companies’ Creditors Arrangement Act, a law that’s normally used by companies that are trying to restructure under bankruptcy protection. CCAA prevents creditors from seizing assets and halts lawsuits against the company.

As the restructuring drags on, it’s still not clear exactly how much money Canadian investors will recoup. While the committee had hoped that those who hold the long-term notes until they expire would receive most of their value back, it’s believed that investors who need to sell the paper quickly once the market’s unfrozen could lose one-third or more.

Delays Cause More Pain

I proposed last summer the plan dump its ABCP assets as soon as possible to get what they could. Instead the plan was frozen in a bureaucratic boondoggle in which they hoped to convert short term paper in to long term paper. Now, seven agonizing months later, the plan seeks a different solution: bankruptcy.

On the Expect Everything To Be Worse Than Expected principle, if losses are held to 33% I will be amazed. However if by some magic they are, then the losses might have been as little as 15%, seven months ago.

The Psychology Of Suspended Redemptions looms large simply because so many hedge funds and asset managers refusal to accept reality until margin calls or bankruptcy forces the issue.

Mike “Mish” Shedlock
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