There’s a little bit of good news for holders of restructured asset-backed commercial paper, resulting in a chance at better returns and reducing the risk that the restructured paper will fall apart.
HSBC Plc, one of the banks involved in about $6-billion of the complicated derivatives trades behind the ABCP, has agreed to wind up the derivatives. The way the market is at the moment, HSBC owes the ABCP holders money. That money will be paid out, and the trades cancelled.
The cancelled trades represent roughly 7 per cent of the derivatives backing the paper.
There are small holders of asset-backed commercial paper all across Canada who stand to benefit, as the change improves the likelihood that they will get their money back.
“It’s good news,” said Colin Kilgour, who advises ABCP holders on their options. “It reduces risk slightly and increases the economics.”
The way the original asset-backed commercial paper worked, investors bought what they thought was short-term debt with slightly higher interest rates than available on comparable money-market paper. The money to pay the interest on the paper came from income from derivatives trades that also exposed the holders to risk that the paper would default.
The ABCP market froze in the financial crisis, resulting in a huge restructuring to try to preserve the savings of those who had invested in the $36-billion market. In many ways, it was the biggest Canadian casualty of the global financial crisis.
Even though HSBC is paying now, the ABCP holders won’t get the money immediately. Rather, they will get it when the restructured paper they have matures a few years down the road.
The decision also saves the holders money, in that trust that was created out of the frozen ABCP has to pay a yearly fee for a standby credit line. With fewer derivatives outstanding, the credit line can be cut back, resulting in a savings on fees. That again should mean more money for ABCP investors when the restructured paper comes due.