A Note On The Asset Backed Commercial Paper Crisis

As everyone is now painfully aware, a liquidity crisis in the Canadian Asset Backed Commercial Paper ("ABCP") market commenced in August of last year, resulting in a number of large institutional holders of that paper putting together a rescue package. The package initially was called the "Montreal Accord" and has subsequently resulted in the filing of a Plan of Compromise and Arrangement ("Plan") under the Companies' Creditors Arrangement Act ("CCAA").

The concept of the Plan is to "term out" the affected commercial paper without, in the vast majority of cases, material reduction in value to any holder, provided they are prepared to hold the commercial paper to maturity. The ABCP market emerged because of a large demand from institutional investors and others for high-quality assets (as measured by rating agency criteria) with returns better than those of comparably rated government securities. Special purpose trusts were formed to issue short-term commercial paper