More Coventree details

If you are at all curious about who got what of the Coventree (COF:TSX) IPO proceeds, Barry Critchley wrote a piece back in November about the IPO here. I had mistakenly thought the $40MM IPO was to raise capital to run the biz, but according to Mr. Critchley, it was a secondary deal. (So says the prospectus.) In fact, most of the shares that were sold on the November IPO were offered by Coventree’s largest shareholder, the Caisse de Depot. CDP took their 29% ownership stake down to 9.9% post-offering — the precise level below which any future sales would have to be disclosed to the marketplace.

Late last night, Coventree put out a release that gave some insight into how their “liquidity providers” were behaving. It seems that Coventree was able to re-fi about $450 million of their serier A paper, the very paper that was “liquidity-backed”. I assume the banks showed up with $450 million of their committed $700 million line (From the release: “Certain liquidity providers have advanced funding, some have disagreed that they have an obligation to fund, some are in discussions with the Company and some have not responded.”).

Up until things got wonky for them, Coventree’s commercial paper program would sell investment grade paper to institutional investors with terms as short as one day, and as long as ~6 months. As such, these roll-over events will be happening with much frequency. It appears from the press releases that the “E” notes will be extended for the full 364 days allowed under the trust indenture, and the “A” notes are forced to rely on the appetite of the liquidity banks; plu sthere’s the issue of just how much “liquidity” is available from these banks relative to Coventree’s $16 billion program.

It will be interesting to see what happens on August 16th, which is the third day following the day that certain “A” notes that were not repaid, according to the release below. Did the indenture trustee send a notice to Coventree’s conduit that it wanted to be repaid and if not, there would be an event of default and a calling of the underlying collateral? One can only assume that the trustee didn’t demand payment, as the release was silent on the topic.

Hopefully, that’s true. Time is needed to work this out, and the type of collateral pledged to support the commercial paper isn’t going to go AWOL this week. According to the prospectus, 37% of the ABCP conduit assets were corporate loans and bonds, 23% were residential mortgages, 16.5% were commercial mortgages, 10% were personal lines of credit, 4.5% were equipment leases, etc. Those assets won’t be impaired a week from now, and provided the security was always good, Coventree management would certainly benefit from some patience and the requisite to try to line up alternative sources of financing or buyers for the portfolios. That doesn’t mean the stock wasn’t a short yesterday morning, but the commercial paper investors shouldn’t sweat just yet.

“TORONTO, Aug. 14 /CNW/ – Coventree Inc. (TSX: COF) today announced that it was able to place liquidity-backed ABCP (also known as A notes) in the aggregate amount of approximately $450 million issued by Coventree-sponsored ABCP conduits including Aurora, Comet, Gemini, Planet, Rocket, Slate, SIT III and SAT and was able to place extendible ABCP (also known as E notes) in the aggregate amount of approximately $150 million issued by the Coventree-sponsored ABCP conduit, Rocket. This ABCP was purchased primarily by investors who elected to renew or roll-over their ABCP that matured today.

Coventree had previously announced that it was unable to place new ABCP to fund the repayment of previously issued ABCP that matured yesterday, it had extended E notes in an aggregate amount of $250 million and issued notices requesting funding in the amount of $700 million under liquidity facilities provided under A notes. As a result of the continuing market disruption, today it has extended the term of E notes that matured today in the aggregate amount of approximately $60 million issued by Coventree-sponsored ABCP conduits including Aurora, Comet, Gemini, Rocket, Slate and SAT. On behalf of its conduits, Coventree has also issued notices requesting funding under liquidity facilities that support the A notes in the Coventree-sponsored conduits including Aurora, Rocket, and SAT that matured today in the aggregate amount of approximately $60 million.

While Coventree sponsors and administers these conduits, they are separate legal entities and the ABCP issued by them is non-recourse to Coventree.

A notes are supported by liquidity facilities that are intended to protect ABCP investors from a market disruption that prevents the redemption and roll-over of their notes at maturity. The facilities contain various conditions that must be satisfied before a liquidity provider is obligated to fund under its facility, including that (i) the rating of the liquidity-backed notes is confirmed by DBRS Limited at R-1 (high) or R-1 (middle), as the case may be, and (ii) the definition of what constitutes a market disruption is met. DBRS Limited has again today reconfirmed the applicable outstanding ratings of the liquidity-backed ABCP issued by Coventree’s conduits and,
accordingly, the credit quality of the underlying assets. On behalf of its conduits, Coventree has issued notices to liquidity providers under each of the facilities referred to above. Certain liquidity providers have advanced funding, some have disagreed that they have an obligation to fund, some are in discussions with the Company and some have not responded. There is no
assurance that the liquidity providers to whom notice has been provided under A note facilities during the ABCP market disruption will fund or be obligated to fund under the relevant liquidity agreements. If liquidity is unavailable under the terms of a facility or the liquidity providers do not fund as required under the relevant agreements, that could lead to a default by a
conduit in respect of its issued and outstanding ABCP.

Coventree’s conduits have not paid the A notes that matured on August 13, 2007 or the A notes that matured on August 14, 2007 that the Coventree-sponsored ABCP conduits were unable to roll-over. Under the terms of the respective indentures governing the ABCP, upon a failure to pay, the indenture trustee may give notice to the respective conduits that such
payments must be made within three business days, failing which an “Event of Default” will occur in respect of the related conduit, which may lead to acceleration of all obligations owing by the conduit.

E notes are not supported by liquidity facilities. The terms of E notes provide for the automatic extension of the notes that, when combined with the original term of the notes, can be up to 364 days in the event of a market disruption. An extension is subject to the satisfaction of the condition that nothing has happened to the conduit or its assets that would result in a
ratings downgrade. Investors are, in effect, providing the requisite liquidity and receive a premium yield for bearing this risk. Investors receive a premium interest rate during the extension period.

At this time, the Company is unable to predict the extent of the impact….”

For those of us that ever thought about using conduits and securitization programs to support our lending activities, these past few days are a stark reminder of how important it is to have your own dedicated source of long term funding. Some lenders actually borrow a mahjority of their capital from larger firms and lend it back out at higher rates, others have permanent share capital within a corporate structure, and firms such as ours use recirculating limited partnerships as a funding vehicle. In our case, we’re coming up to the end of year one of an eight year fund. Our clients (current and prospective) can feel confident that our capital will be there tomorrow, next quarter, and next year….

MRM