Coventree Provides Update on ABCP Market Disruption

    Toronto Stock Exchange Symbol: COF

    TORONTO, Aug. 22 /CNW/ - Coventree Inc. (TSX: COF) today provided an
update on its view of the current disruption in the Canadian asset-backed
commercial paper ("ABCP") market. Coventree announced that Coventree-sponsored
conduits did not place any liquidity-backed ABCP (also known as A notes) or
extendible ABCP (also known as E notes) today. In aggregate, approximately
$94 million of A notes and $305 million of E notes issued by Coventree's
conduits matured today. Since the beginning of the market disruption,
approximately $3.3 billion of A notes issued by Coventree-sponsored conduits
has matured, of which approximately $450 million of new A notes has been
issued to the investors that held an equal amount of A notes that matured
during the market disruption. These issuances are often referred to as ABCP
holders "rolling" or "rolling-over" their ABCP. In addition, during that time,
an aggregate of approximately $2.2 billion E notes has matured, of which
approximately $163 million has been rolled-over into new E notes and the
remaining E notes have been extended.
    While Coventree sponsors and administers these ABCP conduits, the ABCP
issued by them are not obligations of Coventree or guaranteed by Coventree.
Notwithstanding that Coventree has consolidated these ABCP conduits and other
special purpose entities ("SPEs") in its financial statements in order to
comply with Canadian generally accepted accounting principles ("GAAP"), the
assets in such Coventree-sponsored conduits and other SPEs are not owned by
Coventree and therefore cannot be used by Coventree in its business nor are
they available to meet the obligations of Coventree to its creditors.
Similarly, the liabilities of such Coventree-sponsored conduits and SPEs are
not obligations of Coventree - the recourse of the debtholders of a conduit or
other SPE is generally limited to the assets of that conduit or SPE, as the
case may be. For further information regarding Coventree's results and
financial condition without giving effect to the consolidation of these
conduits and SPEs, please see note 3, "Segmented Information" to Coventree's
interim consolidated financial statements as at June 30, 2007.
    Coventree's two primary sources of recurring revenues, credit arbitrage
transactions and traditional securitization program fees, are both dependent
on income generated from Coventree-sponsored conduits. Credit arbitrage
transactions reflect the most significant proportion of Coventree's revenues.
Collectively, revenues from credit arbitrage transactions and traditional
securitization program fees represent over 90% of Coventree's revenues for the
nine months ended June 30, 2007. In credit arbitrage transactions, Coventree
earns fees that, in effect, are equal to the difference between the return on
the credit arbitrage investments made by the Coventree-sponsored conduit and
the conduit's cost of funds, which is the interest payable on
Coventree-sponsored conduit's ABCP. In most cases, the return on the
investments made by the conduit is in the form of a fixed spread above the
Canadian deposit offering rate, or CDOR. The interest payable on the
Coventree-sponsored conduit's ABCP is also priced based on a spread above
CDOR, but that spread is variable. As a result of the market disruption,
spreads on the A notes and E notes issued by Coventree-sponsored conduits have
widened to approximately 50 and 110 basis points above CDOR, respectively, for
ABCP that is rated R-1 (high). At these spread levels, Coventree's revenues
from credit arbitrage transactions will in the short-term be reduced to zero.
    Coventree also earns fees from securitization transactions for its
traditional securitization clients. In traditional securitization
transactions, a Coventree-sponsored conduit purchases assets such as
residential mortgages, auto loans or leases and equipment leases. A conduit's
revenues are comprised of the interest earned on the assets so purchased. Its
expenses include the interest payable on the ABCP issued to finance the
purchase as well as other costs such as trustee fees and expenses, commercial
paper dealer commissions and program fees payable to Coventree. These fees and
expenses are paid in accordance with a hierarchy or priority in which the
interest payable on the outstanding ABCP and certain other expenses typically
rank ahead of the program fees payable to Coventree. Accordingly, in
circumstances where the interest earned on the underlying assets is less than
the sum of the interest payable on the outstanding ABCP plus any other
expenses that rank ahead of Coventree's program fee, there would be
insufficient funds to pay that program fee to Coventree. If current spread
levels continue, Coventree revenues from traditional securitization
transactions may be materially adversely affected.
    In addition, Coventree also earns fees for providing administrative
services to ABCP conduits sponsored by third parties. These fees are not
immediately affected by the current market disruption, though Coventree cannot
provide assurances as to the long-term impact of the market disruption on this
fee income.
    The current market disruption has had a negative impact on Coventree's
credit arbitrage and traditional securitization transactions, which has
resulted in a material adverse effect on the current revenues of Coventree. If
the market disruption were to continue, Coventree expects that it will have a
material adverse effect on Coventree's business, operations, assets and future
    At this time, Coventree continues to be unable to predict the extent of
the impact of the current market disruption on its financial results,
business, operations and financial condition, including any impairment of
assets in future periods. Further, Coventree is unable to predict how long the
current market disruption will continue. Coventree notes that, on August 16,
2007, a consortium (the "Consortium") representing banks, asset providers and
major investors in Canadian ABCP announced a proposal (the "Montreal
Proposal") in which they agreed in principle to take significant steps to
establish normal operations in the Canadian third party ABCP market. Coventree
remains supportive of the Consortium's efforts to stabilize the ABCP market
reflected in the Montreal Proposal. Coventree is aware of the efforts of the
Consortium to convert the Montreal Proposal into a detailed plan; however
until such plan is finalized, Coventree is not able to assess the Montreal
Proposal's impact on Coventree and the Coventree-sponsored conduits.
    Coventree has previously announced it was aware that investors have been
unable to roll-over Coventree-sponsored conduits' ABCP. Coventree understands
that this difficulty arose where less than all of a note held by the
depositary on behalf of beneficial owners is paid or rolled-over on its
maturity date. Coventree, the depositary and the note issuing agent are
working together to establish a protocol under which a note can be rolled-over
in such circumstances to reflect the specific wishes of the beneficial owner.
Coventree expects that roll-overs of existing ABCP issued by
Coventree-sponsored conduits into new ABCP will be available for investors
    In light of the highly uncertain ABCP market and other conditions facing
Coventree, Coventree has decided to suspend any additional investments in new
concepts or business opportunities. In particular, Coventree will not be
pursuing the creation of a U.S. conduit or the launch of a retail bank at this
time. In addition, Coventree is currently reviewing its expense levels in
light of its prospects and the market outlook. However, Coventree believes it
has sufficient working capital to meet its current operational requirements.
    As noted above, Coventree has consolidated many of the ABCP conduits that
it sponsors and other SPEs in its financial statements in accordance with
GAAP. Under a new accounting standard issued by the Canadian Institute of
Chartered Accountants that was adopted by Coventree on October 1, 2006,
Coventree carries financial instruments, including those held by
Coventree-sponsored conduits, at fair value with changes in their fair value
recognized in income. The methodology used to determine fair value varies
depending upon the nature of the financial instrument - the principal methods
used are quoted market prices, third party valuations, internal valuation
models and quotes from counterparties. As at June 30, 2007, the fair value of
the assets of the ABCP conduits and other SPEs consolidated by Coventree,
including the investments and other financial instruments held, was $16.4
billion, and the fair value of the liabilities of those same conduits and SPEs
was $16.6 billion. Since June 30, 2007, the markets for the investments and
other financial instruments held by the ABCP conduits and other SPEs have
declined, such that the current fair value of those instruments is likely
materially less than the fair value thereof as at June 30, 2007, even though
those investments continue to be rated at their initial rating of AAA or AA,
as the case may be. As a result, if the ABCP conduits and other SPEs were to
sell those investments and other instruments at current market prices, it is
likely that such conduits and SPEs would incur a loss and would not generate
sufficient cash to repay in full their respective outstanding indebtedness.
For further information, including the definition of "fair value", please see
note 2(b), "Basis of Presentation - Change in Accounting Policy", note 14(b),
"Financial Instruments - Fair Value Measurement" and note 14(c), "Financial
Instruments - Valuation Methods and Assumptions" to Coventree's interim
consolidated financial statements as at June 30, 2007.
    Coventree believes that the spread widening referred to above for the
ABCP issued by Coventree-sponsored conduits is a consequence of liquidity
issues facing the Canadian ABCP market rather than concerns with the quality
of the assets in Coventree-sponsored conduits. Coventree continues to believe
in the high quality of those underlying assets. In aggregate,
Coventree-sponsored conduits have limited exposure to U.S. subprime mortgages
- as at July 31, 2007, approximately 4% of the ABCP and other debt issued by
Coventree-sponsored conduits is backed by assets related to U.S. subprime
mortgages; however, the asset mix varies from conduit to conduit and from
series to series within each conduit such that the applicable asset mix may be
materially different from the aggregate numbers reported in this press
release. Those assets continue to be rated AAA by DBRS and, in certain cases,
by U.S. rating agencies. As a result, the ABCP issued by Coventree-sponsored
conduits continue to maintain their initial high ratings of R-1 (high) or R-1
(middle), as the case may be, by DBRS based on its analysis and ratings of
these assets, although these ratings are under review. The review status
arises as a result of the conduits' failure to roll A notes, and the resulting
risk of enforcement actions on behalf of noteholders, not a deterioration of
asset quality.
    In response to requests received by Coventree from the investment
community, set out below is an updated table that provides the approximate
breakdown, in the aggregate, of the different underlying assets and asset
classes that back the ABCP and other debt issued by Coventree-sponsored
conduits. Except as indicated below, the breakdowns by asset class set out
below do not include conduits previously managed by Nereus Financial Inc.
("Nereus"), represent the breakdowns as at the end of the fiscal year
indicated and reflect the amount of the ABCP and other debt issued to acquire
such underlying assets.

                           2007(1)(2) 2007(1)   2006    2005    2004    2003
                           ---------- -------   ----    ----    ----    ----
    Asset-Backed Securities     6.2%    7.1%    6.7%    8.4%    8.3%    2.7%
    Auto Leases & Loans         0.5%    0.6%    0.6%    3.2%    5.3%    4.6%
    Auto, Other                 0.2%    0.3%    0.3%    0.4%    0.6%    0.6%
    Corporate Loans & Bonds    55.5%   42.7%   41.1%   31.7%   28.1%   29.7%
    Credit Card Receivables     0.0%    0.0%    0.0%    1.8%    0.0%    0.0%
    Equipment Leases & Loans    2.4%    3.1%    3.5%    8.0%   10.6%   11.9%
    Mortgages - Commercial     11.3%   14.8%   15.6%   20.0%   27.8%   36.5%
    Mortgages - Residential    15.9%   20.9%   22.2%   22.6%   14.8%    8.8%
    Personal Lines of Credit    7.7%   10.2%    9.5%    3.1%    4.3%    5.2%
    Trade Receivables           0.3%    0.3%    0.5%    0.7%    0.3%    0.0%
                              ------  ------  ------  ------  ------  ------
    Total                     100.0%  100.0%  100.0%  100.0%  100.0%  100.0%
                              ------  ------  ------  ------  ------  ------
                              ------  ------  ------  ------  ------  ------

    (1)  Reflects breakdown as at July 31, 2007.
    (2)  Including the Nereus-sponsored conduits Structured Investment Trust
         III and Structured Asset Trust. Prior to May 10, 2007, when
         Coventree acquired the remaining 24.5% of Nereus that it did not
         then own, Nereus-sponsored conduits were managed separately from
         Coventree-sponsored conduits.

    Forward-Looking Statements

    This press release includes certain forward-looking statements, including
those identified by the expressions "may", "would", "could", "will",
"anticipate", "believe", "plan", "forecast", "estimate", "expect", "intend",
"aim", "vision", "mission", "endeavour" and similar expressions to the extent
they relate to Coventree or its leaders or management ("leaders"). The
forward-looking statements are not historical facts but reflect such leaders'
current expectations regarding future results or events based on information
currently available to the leaders.
    These forward-looking statements are subject to a number of known and
unknown risks, uncertainties and assumptions. Many factors could cause actual
results, performance or events to differ materially from current expectations
that may be expressed or implied by such forward-looking statements,
including, without limitation, the matters discussed under "Risk Factors"
contained on pages 58 to 65 of Coventree's Final Prospectus dated November 15,
2006 and in other sections herein and therein. Should one or more of these
risks or uncertainties materialize, or should assumptions underlying the
forward-looking statements prove incorrect, actual results, performance or
achievements could vary materially from those expressed or implied by the
forward-looking statements contained in this report. These factors should be
considered carefully and prospective investors should not place undue reliance
on the forward-looking statements. Although the forward-looking statements
contained in this press release are based upon what Coventree's leaders
currently believe to be reasonable assumptions, the leaders cannot assure
prospective investors that actual results, performance or achievements will be
consistent with these forward-looking statements. These forward-looking
statements are made as of the date of this press release and Coventree does
not intend, and does not assume any obligation, to update or revise these
forward-looking statements.

    %SEDAR: 00024386E

For further information:

For further information: Craig Armitage, The Equicom Group Inc., Tel:
(416) 815-0700 x278, Email:

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