TORONTO, ONTARIO: FEBRUARY 09, 2012 - Bay Street in Toronto, Ontario is seen here Thursday Feb. 9, 2012. (Tim Fraser for The Globe and Mail) (For ROB story by n/a)Tim Fraser/The Globe and Mail
One of the sad truths in the denouement to the asset-backed commercial paper fiasco is that most of the losses from that mess were sustained in Canada, while most of the gains in the restructuring are accruing to investors outside the country.
There are still some returns to be had by buying the restructured paper, and safe ones at that, say managers who have been purchasing the paper, even if the big gains are in the past.
The asset-backed commercial paper (ABCP) crisis began in the credit crunch, when about $30-billion of money market paper that was thought by buyers to be solid and trustworthy suddenly froze up and couldn't be redeemed. The paper was eventually restructured into new notes, this time maturing in about seven years. However, many holders needed their money up front (after all this was in many cases short-term savings that had been in a money market instrument). They sold at a loss.
The buyers have been, in the main, hedge funds out of the U.S. that have a particular focus on restructurings. Cerberus Capital Management and York Capital Management, firms with tens of billions of dollars in assets, are said to be large holders.
Here at home, the only really significant purchaser was GMP Investment Management's ABCP fund, a hedge fund set up specifically to buy this one type of paper.
"At times, we were the only guys in Canada willing to buy the paper," said Jason Marks, the chief investment officer at GMP IM. "Imagine how dumb we looked. Nobody else wanted to touch this."
Mr. Marks knew the paper from his time working on the trading desk at Toronto-Dominion Bank. He avoided the paper before the restructuring because of what he perceived to be flaws. But once those issues were fixed in the restructuring, he had no trouble buying it.
It has worked. So far the fund has returned 42 per cent since its inception in 2008. Last year it increased 24 per cent.
But the returns aren't helping many Canadians. A good chunk of the investor base for the $300-million fund are American.
You can still buy the paper at a discount, with the paper on average trading at about 83 cents on the dollar, and hold it to maturity, say the fund's managers. Returns aren't going to be as good from here on out. GMP's managers estimate them at just a hair under 6 per cent a year. But that's more than an investor would get on high-yield bonds, they point out.
Thanks to the way the restructuring was done, there's also not much risk left in the ABCP trade. When the derivatives underlying the paper were restructured, the triggers that could lead to a margin call and another ABCP crisis were set up so they steadily got harder and harder to hit. By this point, the triggers are so far out of the money that if things got so bad as to cause another freeze in ABCP, the investing world would really have to be verging on ending.
Also, many of the derivatives trades behind the rebuilt paper are maturing in coming years, so vanishing from the structure.
"From a risk-adjusted return perspective, that's the best trade that exists," argues Kevin Barnes, president of GMP Investment Management. "Your odds of losing money on that trade are basically zilch."
By his math, given the discount on the paper and the amount outstanding, "there is still $1.2-billion left to be made on this trade. Wouldn't it be great to have those profits made in Canada?"
Time to stop for a reality check. This is not all patriotism. Money managers get paid more when they get more money into their funds (in this case, the managers get paid 1 per cent of assets plus 10 per cent of any returns over a hurdle rate of 6 per cent). What's more, nothing is a sure thing.
But there is some truth to what the managers at GMP are saying. Restructured ABCP continues to be a source of predictable returns for those brave enough to hold it. The structure is very solid. It's a credit to the people who did the restructuring.
It is a shame that Canadian investors took the losses, Canada's reputation took a hit, Canada's government's provided crucial backstops for the restructuring, and now we're missing out on the rebound.
(Boyd Erman is a Globe and Mail Capital Markets Reporter & Streetwise Columnist.)