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More funds sign on to bailout strategy

Industrial Alliance joins move to buy back non-bank ABCP; Meritas Financial board examining 'plan of action'

FUNDS REPORTER -- Industrial Alliance Insurance and Financial Services Inc. yesterday became the latest financial player to move to protect investors in its money market funds that hold troubled commercial debt.

Meritas Financial Inc., a small private fund company, also said yesterday that it has a plan to protect investors, and is considering buying back non-bank ABCP in its money market and bond funds to deal with the liquidity crisis.

Industrial Alliance, a Quebec City-based insurer which also owns mutual fund company IA Clarington, said it expects to devote $77-million to buying non-bank-administered asset-backed commercial paper (ABCP) plus accrued interest from all of the group's segregated and mutual funds.

"We are doing this to reassure investors regarding the integrity of the liquidity and the investment objectives of our money market funds," Eric Frape, senior vice-president of product and business development at IA Clarington, said in an interview.

Michel Naud, manager of investor relations for Industrial Alliance, said the insurer has a total exposure of $235-million to ABCP, but does not expect liquidity problems in the non-money-market funds where this debt represents only up to 2.7 per cent of their portfolios.

Asset-backed commercial paper is short-term debt that is backed up by packages of loans, ranging from credit card receivables to car loans and mortgages.

On Monday, National Bank of Canada said it would buy back $2-billion of ABCP held in money market funds managed by the bank and its Altamira mutual fund subsidiary. Groupe Desjardins said it would buy about $100-million in such debt from its money market funds as well.

Meritas, which markets socially responsible mutual funds, is owned by the Mennonite Savings and Credit Union, Mennonite Mutual Aid and Mennonite Foundation of Canada. Meritas's board of trustees is currently examining a "plan of action," said Gary Hawton, chief executive officer of the Cambridge, Ont.-based firm.

"Our entire holding is less than $2-million in all of our funds," he said. "But if the fund is going to be made whole, somebody has to assume the loss. It would essentially be the owners of Meritas who would - if that route was chosen."

The Meritas money market fund has about 30 per cent of its assets in ABCP that would fall under a proposed bailout plan announced last Thursday by a group of financial institutions led by the Caisse de dépôt et placement du Québec.

The proposal calls for turning the non-bank ABCP, which can't find buyers, into longer-term debt with maturities of up to 10 years. The problem, however, is that money market funds are not permitted by law to hold debt with maturities greater than one year.

The problem with money market funds holding long-term debt, and the fact that the conversion won't likely take place until at least October, is pushing financial players into buying the ABCP from the money market funds, Mr. Hawton suggested.

Once the money market funds get the cash for the ABCP, they can buy other short-term investments like Treasury bills.

But Mr. Hawton suggested that a market will eventually develop for the longer-term converted ABCP.

"I think it can be assumed that there would be a market for the longer-term floating notes somewhere down the line," he said. "It is expected that dealers across Canada will create a market for these notes. ...

"Then, whoever holds the notes could choose to hold them to maturity, and get all of their money back if there were no defaults in the underlying assets," Mr. Hawton added.

"This is more of a liquidity crisis than an asset quality or credit crisis."

© 2007 The Globe and Mail. All rights reserved.

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