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Enron Mail |
Mark, I wanted to get back to you on your questions and also give a little
more detail of the analysis. As you know, we have issues in Canada about taking cash collateral, which issues have been clearly identified and communicated by Peter previously (see his e-mails of March 20, 2001). However, as opposed to cash, it appears clear under our personal property registration legislation that a certified cheque and a bank draft would fall under the definition of "instruments". Under such legislation, as Peter has indicated below, a security interest in "instruments" can be perfected by possession, thus eliminating the need to register the security interest at the personal property registry, which requirement to register creates the perfection and priority concerns we have with holding cash collateral. Therefore, at first blush, it seems that a counterparty providing a certified cheque or bank draft to us (in lieu of cash collateral or a letter of credit), which certified cheque or bank draft would be held by us in the same manner as we hold L/Cs, might solve our cash collateral concerns and make another credit instrument available to us for use in Canada. There are a few concerns, which I think are raised by your questions. The first is that, if we take the instrument and immediately convert it to cash and place the cash in an account, we run into the exact same issues as we have with taking cash collateral in the first place. The personal property security legislation specifically indicates that proceeds realized from dealing with the original collateral need to be perfected in the same manner as original collateral of the same kind (ie. where the proceeds from the bank draft are cash, we need to then perfect our security interest in the cash as if the original collateral was cash, meaning we have the exact same issues as we currently have with perfecting a security interest in cash collateral). Therefore, we would need to deal with the instrument (bank draft or certified cheque) in the same manner as we deal with L/Cs. That is, we would cash the instrument in payment of outstanding accounts at the time that we become entitled under the contract to apply our collateral against amounts owing to us from the counterparty. We would have to actually hold the certified cheque or bank draft until such entitlement arose. The requirement to hold the bank draft or certified cheque for a potentially extended period of time raises another concern about how long such an instrument can remain outstanding before it becomes "stale dated" and thus undrawable. In other words, it may well be that a bank will only allow such instruments to be drawable if they are presented for payment within a reasonable time of their issuance. This is one point that would require further research if we are going to consider utlizing such instruments as collateral, since the answer could obviously make the use of such instruments a solution for only very short term transactions, if at all. The final point I would make is also raised by your second question below. My understanding is that the law in Canada has been somewhat grey in the past with respect to whether a person who issues a certified cheque (or the bank on which the certified cheque is drawn) can stop payment on such a cheque after it has been issued. I believe that there may have been some recent Ontario decisions indicating that a cheque, once certified, must be honoured upon presentment and if the bank upon which the certified cheque is drawn refuses to pay, it will be liable for the amount. However, we would need to look into this point further, as any risk that a certified cheque can be withdrawn by the payor at any time after it has been issued obviously eliminates the benefit of the collateral. I do not believe that the same concern exists for a bank draft, as I believe it represents a fully funded obligation of the bank to pay, which is irrevocable. If we wish to consider using such instruments as an alternate form of collateral, I would suggest that we have such use vetted by outside counsel and obtain an opinion as to the viability and risks associated with such use. Since Stikeman Elliott provided our opinion with respect to cash collateral, I would suggest that we use them to provide the advice on these points as well. Please let me know if you would like me to instruct outside counsel to proceed. Thanks Greg From: Mark Taylor on 04/03/2001 09:05 AM CDT To: Peter Keohane/CAL/ECT@ECT cc: Brent Hendry/NA/Enron@Enron, Carol St Clair/HOU/ECT@ECT, Chris Gaffney/TOR/ECT@ECT, Greg Johnston/CAL/ECT@ECT, Mark Powell/CAL/ECT@ECT, Mary Cook/HOU/ECT@ECT, Russell Diamond/Enron@EnronXGate, Sara Shackleton/HOU/ECT@ECT, Tana Jones/HOU/ECT@ECT, Tanya Rohauer/Enron@EnronXGate, William S Bradford/Enron@EnronXGate Subject: Re: Cash Collateral Sounds like a great idea. a couple of questions: Can we convert the draft into cash and still maintain our security interest? If not, can we get the bank to somehow guarantee that the funds will be there - in the US that would require either certification by the bank of the customer's draft or the issuance of an actual bank or cashier's check. Peter Keohane 04/02/2001 07:02 PM To: Mark Taylor/HOU/ECT@ECT, Sara Shackleton/HOU/ECT@ECT, Brent Hendry/NA/Enron@Enron, Mary Cook/HOU/ECT@ECT, Carol St Clair/HOU/ECT@ECT, Tana Jones/HOU/ECT@ECT, William S Bradford/HOU/ECT, Russell Diamond/HOU/ECT, Tanya Rohauer/HOU/ECT cc: Greg Johnston/CAL/ECT@ECT, Mark Powell/CAL/ECT@ECT, Chris Gaffney/TOR/ECT@ECT Subject: Cash Collateral Greg Johnston may have a solution to the limitation on Canadian cash collateral. Without getting into detail, a security interest in an "instrument" can be perfected by possession under the Personal Property Security Act, and an "instrument" includes a bank draft. If counterparties were to provide bank drafts on the same terms as they provide LCs we could rely on perfection by possession. Is this something we should investigate further? Peter.
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