A group of financial institutions unveiled a plan Thursday to ease a credit crunch in Canada's C$116 billion ($108 billion) asset-backed commercial paper market, winning tentative market applause though jitters remained.
The players, which include Canadian pension funds and international banks, said they were confident of support for their proposal from investors holding at least two-thirds of Canada's third-party asset-backed commercial paper.
They expected other players to sign on within hours to the deal to convert ABCP, which is short-term debt mostly with maturities of between 30 and 60 days, into long-term notes that will expire only after several years.
"At the very least it will inject some much needed calm in the Canadian money market," said Doug Porter, deputy chief economist at BMO Capital Markets.
"More broadly, the market is still dealing with much bigger concerns beyond our borders and those aren't going away. But clearly this has injected a lot more confidence into the Canadian dollar," he told Reuters.
At 11.30 a.m. the Canadian dollar edged firmer to C$1.0745 to the U.S. dollar, or 93.07 U.S. cents, up from C$1.0778 to the U.S. dollar, or 92.78 U.S. cents at Tuesday's close.
But Toronto's main stock market index tumbled more than 500 points or 3.9 percent by midday on Thursday, its biggest single-day loss since the dying days of the tech boom, buffeted by falling commodity prices and as investors remained leery of problems in global credit markets.
Shares in Coventree, the small Canadian structured finance house that first sounded the alarm on the ABCP crunch, were down 10 percent or 40 Canadian cents at C$3.50 after it said it was again unable to sell any paper and requested C$790 million in funding.
That brings Coventree's total liquidity request since Monday to C$1.6 billion.
What started out as defaults by homeowners with spotty credit records in the U.S. subprime mortgage market as interest rates rose has widened to concerns about debt capital markets in general, including Canada's ABCP market, in particular that segment operated by non-bank or third-party players estimated to be worth C$40 billion.
This has resulted in investors in this type of short-term debt -- traditionally regarded as safe because it is backed by assets such as home and car loans -- cutting or eliminating their positions in the market.
The exit of investors, which include money market and pension funds, resulted in debt issuers not being able to raise money to repay debt that is maturing, leading them to ask banks for funding lifelines and raising fears they could default.
"There will be no need to roll the commercial paper. There will be no more liquidity problem. The lenders are basically off the hook now," said one money market trader in response to news of the plan by ABCP market players.
The financial players at Wednesday's meeting to find a ABCP market solution were Caisse de depot et placement du Quebec, which manages Quebec's public sector pension plans, ABN AMRO, Barclays Capital, Desjardins Group, Deutsche Bank, HSBC, PSP Investments, Merrill Lynch, National Bank of Canada and UBS, as well as rating agency DBRS.
Asked if the Caisse, which the Globe and Mail newspaper said is the biggest player in the C$40 billion third-party ABCP market, had initiated the bailout discussions, Mark Boutet, a spokesman for the group of financial institutions said: "It was a collective effort. There are discussions ongoing with a number of financial institutions including (Canada's big five) banks." The names of Canada's big five banks were noticeably absent from the bail-out statement.
The short-term proposals from the market players include an agreement from the signatories to roll third-party ABCP for a 60-day standstill period. Signatories will not pursue liquidity calls, or make new liquidity calls for 150 days after the standstill agreement.
In the longer term, the players propose converting all outstanding third party ABCP, including extendible third party ABCP, into term floating-rate notes which will pay interest monthly or quarterly.
"Existing liquidity facilities will therefore not be necessary and will be canceled and all outstanding liquidity calls will be revoked," the statement said.