ABCP interest payments anticipated soon

While more than $36 million in questionable government investments will be tied up for another five years, interest payments on the principal should start trickling back into Yukon coffers later this month.

While more than $36 million in questionable government investments will be tied up for another five years, interest payments on the principal should start trickling back into Yukon coffers later this month.

In the summer of 2007, Department of Finance officials dumped a total of $36.3 million in public funds into two separate purchases of asset backed commercial paper (ABCP), with the understanding these were to be short five-week turnaround investments.

However, the ABCP notes - hedges totalling $32 billion Canada-wide - were frozen in the fall of 2007 after the U.S. sub prime mortgage collapse rendered them virtually worthless.

What followed were 16 weeks of intense negotiations between large-scale ABCP investors, whose restructuring plan was delayed from taking effect last summer by a small group of minor stakeholders.

Their legal challenge was eventually quashed in the Ontario Court of Appeal, but market volatility continued.

By Dec. 24, 2008, a financial backstop worth $4.5 billion - courtesy of Alberta, Ontario, Quebec, Ottawa and foreign banks - appeared the last best chance to salvage billions tied up in the fledgling notes.

This most recent restructuring plan awaits court approval in mid-January, but investors - including the Yukon government - are confident.

“We should see on Jan. 16, the receipt of our new notes and on or about that day, we should receive the interest due to us for the period we bought it to Aug. 31, 2008,” Clarke LaPrairie, assistant deputy minister of Finance, told the Star Tuesday.

A second interest payment from August 2008 to Jan. 16 would follow, LaPrairie added.

The tentative deal, involving the issuance of new commercial paper notes, would not only save the Yukon government’s investment, but would save face for the Finance department and Premier Dennis Fentie’s government.

After Auditor General Sheila Fraser reported in February 2008 that the investment violated Yukon law, Fentie took a significant amount of heat. It culminated last November, when Opposition and Liberal Leader Arthur Mitchell demanded the premier resign over the debacle.

Earlier that month, the government released its public accounts whereby Mitchell disputed the Finance department’s $6-million write down from the original $36.3 million.

Previously, Mitchell suggested Ottawa bail out the territorial government by buying the Yukon’s share of ABCP.

While Fentie scoffed at calls he resign and dismissed supplicating for a federal lifeline, he appeared to be in a similar position as other smaller investors - waiting for a miracle.

“I can’t say definitively what the feds intend to do there; I can’t give any definite details,” Fentie told the media after emerging from a ministers’ meeting Dec. 18 involving federal Finance Minister Jim Flaherty.

“Obviously (the federal government) is heavily involved in this area in investment and of course are part of the overall restructuring plan ... all concerned here are still proceeding with a restructuring plan and the expectation now is Jan. 2009 we’ll be at the decision point.”

His remarks came just six days before the $4.5-billion federal and provincial governments’ bailout.

Now with the expectation the new deal will be approved, LaPrairie told the Star the Yukon government could end up earning more money - albeit over nine years instead of five weeks - than originally anticipated.

“Starting April 22 of this year, we’re going to start receiving quarterly interest payments that will fluctuate,” said LaPrairie.

But without a crystal ball, it is impossible to predict the value of those returns. As markets illustrated in 2008, and the original ABCP investment revealed in 2007, there are no sure things.

“That (interest rate tied to banker’s acceptance) changes every day, so I can’t guess what that would be over the next nine years,“LaPrairie added.

“Maybe a little less than we would earn than if we bought a short-term deposit (but) more than what we would earn on a treasury bill or bond.”

If the restructuring deal is approved, repayments of the $36.3-million principal would begin 2013 and continue through until 2016, when the entire sum is expected to be recovered.