Xerxes
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Posts posted by Xerxes
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23 hours ago, TwoCitiesCapital said:
Probably the latter. This would have been OTC type swap and it unlikely anybody in the market was looking to specifically short FFH at the same time FFH was looking to buy their own shares.
They probably entered into an arrangement with a market maker. The market maker would hold the position, get paid a small spread + LIBOR to do so, and then would hedge the position by buying shares as you alluded to. No risk for them unless if FFH defaults, which is a minimal risk with either monthly/quarterly P&L settlements and they collect a floating LIBOR+spread for accepting that credit risk.
Thanks.
One could say that Prem used the Reddit-GameStop recipe (buy-calls(derivative)-en-masse-force-market-makers-buy-shares-to-hedge-and the virtuous circle) a full quarter before GameStop made it popular. Not saying that it is the market makers that have pushed the price up but probably contributed to as the spring unloaded itself from a low base.
Must give the man credit.
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While Prem is not selling his Resolute into the rally, Brookfield is .... $1.25 billion worth
"The sales – totalling 14.8 million shares – have cut Brookfield’s ownership of West Fraser from nearly 20 per cent to 7.3 per cent, according to Brookfield’s filings with securities regulators. In the past two weeks, Brookfield has sold nearly 1.24 million shares for $128-million; in a single day, April 1, it sold more than six million shares for $517-million."
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What I want to know some years in the future is the back story behind this self-Total Return Swaps, which was put in place back in Q4 2020 and made public in Q1 2021.
Clearly, someone(s) took the other side of the trade at the moment in Q4 2020 not knowing it was Fairfax sitting on the other side. Could it have been the short-sellers from a decade ago, eager to pounce, that took the other side on a name they know well.
I guess it is not like there was a shortage of bears on the stock. But there is a difference between a bear and a bear that actually puts a trade on. The former is black bear while the latter is a grizzly bear.
So who is the grizzly bear and how many ? ... or is it just market-makers, but then again my understanding is that market-makers are in the business of making markets and not keeping risks. So, if other side of the trade were all market-makers, than they probably hedge their exposure by buying Fairfax stock directly at the same time, thus contributing to its raise.
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On 4/25/2021 at 2:20 PM, ValueMaven said:
Bloomstrad on Berkshire. Very informative:
https://www.theinvestorspodcast.com/episodes/masterclass-in-valuations-w-chris-bloomstran/
Thank you. I am big of fan of that podcast. I miss the voice/intellect of the gentleman who was doing the podcast with Stig, but also appreciate his Bitcoin dedicated podcasts (the not so complicated ones). On the Bloomstran episode, I wasnot able to catch all the nuances. I run while listening to these and this was 2 hours long and very in depth, but here is two comments:
- why is it Bloomstran the only person that talks about the Gen Re pivot. Does he have some sort of intellectual property right on pointing that out and drawing that conclusion. Even Buffet hates the fact that he issued shares (even at a premuim)
- if folks criticize Buffet for not going deep into March 2020 bear market (and selling JPM and the airlines at the wrong time), he is fully responsible for some of that criticism ONLY because he has been the one preaching the "when it rains, bring your bucket" mentality. Now the reason for doing what he did is perfectly ok and correct, but my point is that Buffet has been cultivating an image of a stock picker investor over the decades hunting for deals .... but what he really is, is a CEO of a fairly large conglomerate, first, who also happens to be stock picker value investor. So if people expected for him to go wild and picking up the bargains in April through May 2020, that was on the back of decades of expectations that was built up by him directly.
When was the last time you saw Buffet on CNBC and talking in-depth about the railway, insurance operations. He likes talking stocks.
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i am dragging myself kicking and screaming through Vikings season 4 (on Amazon prime). Man, such bad writing, but i guess i need to finish it.
I did watch the "Courier" a spy movie set during the Cuban missile crisis. (very good movie). Cost as $14 USD, i locked that in with the FX being so low.
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MV US $458 and BV at $478
hmmm ... FFH is getting expensive
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Thanks ! so he has a call-option like agreement with the strike price being set at the Dec 31, 2019 price. ... and he can chose to forfeit that if the price doesn't interest him.
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Longleaf Commentaries | Insights and Reports | Southeastern Asset Management
"Fairfax Financial (FFH) (31%, 1.44%), the insurance and investment conglomerate, was a top contributor in the quarter. The COVID pandemic has had a dramatic impact on the insurance industry. Pricing trends had already turned positive in 2019, yet the losses and uncertainty from a global pandemic pushed the positive pricing trend, a “hard market” in insurance industry speak, to another level. As a result, sentiment toward Fairfax continued to improve as fourth quarter results demonstrated profitable underwriting with a 95.5% combined ratio, and premiums written increased 16% with significant contributions from increased pricing, as the insurance market continues to harden. Fairfax also invests a significant portion of its investments in equity securities with a value orientation. As the overall stock market and value stocks appreciated strongly over the last five to six months, Fairfax’s equity portfolio was a beneficiary. The company increased its book value per share 8% in 4Q, and we expect to see continued growth next quarter. With interest rates beginning to increase, Fairfax is also primed to reinvest in higher yielding debt. The company currently holds a significant portion of its fixed income portfolio in short-term instruments, putting the company in an opportunistic position to capitalize on higher rates. The stock still trades low on book value and normalized earnings multiples. CEO Prem Watsa repurchased over 5% of Fairfax shares through swaps to preserve capital for additional underwriting and also ended the costly market hedges that had stunted Fairfax’s value growth over the last 7 several years. The attractive price environment looks likely to continue, making this one of the best times in years for allocating capital into underwriting."
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On 4/17/2021 at 12:48 PM, Viking said:
RFP closed Friday at US$14.79. March 31 its share price closed at $10.95. Fairfax owns about 30.5 million shares so its position is up close to $90 million in the last 17 days. Even though Fairfax equity positions were up significantly in Q4 and Q1 it appears Q2 is off to a nice start.
Total position in RFP is now worth about $450 million. Its carrying value is $166 million; it is an associate/consolidated holding so gains in stock price are not mark to market.
It is interesting, i was just looking at the 2020 letter and on page 10 i noticed the following:
#Shares of RFP held was at 24.8 million (31%) of the company. Based on this and note from 2018, it looks like Fairfax did indeed sold about 6 million shares of RFP in 2020. Unless there is something i am not thinking about.
And it is already accounted as equity investment (not consolidated)
From 2018 letter:
"Resolute. We have invested $791 million in Resolute and received a special dividend of $46 million, for a net investment cost of $745 million. Our initial investment was a convertible bond purchased in 2008 for $347 million. We invested an additional $131 million prior to Resolute entering into creditor protection and most of the remainder during the period from December 2010 to 2013. Subsequent to write-downs and our share of profits and losses over time, at December 31, 2018 we held our 30.4 million Resolute shares in our books at $300 million ($9.87 per share). The current fair market value of these shares is $244 million ($8.03 per share). You can see that Resolute has been a very poor investment to date!"
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Daphne,
FFH is a financial investor not a strategic investor when it comes to these type of assets. Sure, they are strategic investor in other type of assets either in specific region like India or specific sector.
On the other hand, Jim Pattison, the other Warren Buffet of Canada, is into lumber business and in fact was busy building up position in the sector during a depressed market and was working to privatize Canfor in the 2019 year.
Was Prem Watsa busy building up position in the lumber sector during a depressed market ? Did Prem Watsa averaged down on this asset he had owned for more than a decade (i.e. one that he knows well) in March-April 2020, when RFP's entire market value was lower than its RFP's annual dividend payment in Q1 2020 ? no .. it didn't. To me that means he is not looking at it strategically, it is just a very-long short-term financial trade.
Best to close the chapter in a hurrah. The RFP results are coming in about a week time. I think i'll tune in. If FFH doesn't lock in some gains sometimes in Q2/Q3 into the bull market, when then price action is above their own estimate of intrinsic value (after the write-downs), than when would they do that. At the next cycle ? ... or is there such a time as lumber-super cycle.
Admittingly i am clueless on lumber and anything about it. Just an opinion.
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Prem should absolutely use that argument (that is cheap @ 1x earning) when he flips a portion of his shares to the next value investor.
Fairly certain this was meant to be a short-term trade gone long-term trade. Unlike the fellow named Sokol, or John Chen or the Steel gentleman and other captains of industry, we never heard much of the different management that have been managing Resolute in the past decade.
From the 2018 letter: "We have invested $791 million in Resolute and received a special dividend of $46 million, for a net investment cost of $745 million. Our initial investment was a convertible bond purchased in 2008 for $347 million.We invested an additional $131 million prior to Resolute entering into creditor protection and most of the remainder during the period from December 2010 to 2013. Subsequent to write-downs and our share of profits and losses overtime, at December 31, 2018 we held our 30.4 million Resolute shares in our books at $300 million ($9.87 per share). The current fair market value of these shares is $244 million ($8.03 per share). You can see that Resolute has been a very poor investment to date!"
Now that being said: The bull case on this from Fairfax perspective and for NOT selling, is if Resolute can spit out more special cash dividends (pete mentioned that earlier) such that it covers the initial cost and take a king' ransom. As major holder of the name, i hope FFH is pushing for that, and that the surplus earning from these high lumber prices, are being considered to be dividended back to Toronto. No point in re-investing that back into the lumber business (i.e. textile-oriented Berkshire for the good'old 60-70s).
Lastly, selling a sliver of the holding, will (might) probably force FFH to account it as equity investment down from fully consolidated. Not that it matters, but I believe (may be wrong on the accounting) that once it is converted into equity-accounting, the one-line item on B/S that represent net asset will have a fair value in line with the market value at which they sold the sliver. That means an upward adjustment from the current book value that was written down couple of times. Yet i also remember that companies cannot undo their previous impairments. So, not sure what happens in the case of moving from consolidated accounting to equity accounting on the B/S.
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Not easy with 30 million shares and you got Chou that also owns 4.5 million. Both combined 42% of the company. Who is going to trim first ? or are they looking at each other to see who shoots first ...
I dont know if this data is correct from Yahoo Finance:
volume is at 3,733,434 shares, but average volume was at 634,903. There should enough volume to absorb a few trim here and there.
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Not sure of these two statements are overlapping.
Does it mean a combined ~$1.875 billion net gain in Q1, with an understanding a good portion wont go through the P&L.
i guess will know tomorrow
"Our investments increased significantly with net gains on investments currently estimated at approximately $875 million for the first quarter of 2021, primarily reflecting net unrealized gains from our common stock portfolio. Mark-to-market movements on certain of our non-insurance consolidated investments and investments in associates, which will not be reflected in our financial statements, also increased significantly in the first quarter of 2021 by approximately $1 billion. "
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Thanks for posting, i listed to it as well and you pretty much covered anything.
The two new managers are humble and eager to get things done.
I like the question about alignment. If I understand correctly, what he refers to "investment manager" is not owned by the new operators personally. The two new operators own actual shares of the company.
The one thing is missing is that the new management is not "new" in Africa. So i felt they should have perhaps showcased their own past deeds, for the shareholders to get some meat as to what expect.
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Finally, I recommend folks to read Markel 2020 letter to shareholders. Here are two passages that are interesting:
"Tactically, that decision can be criticized as it caused us to reduce our equity exposure by approximately 20% at lower prices than prevailed at the end of 2020."
"In May we raised $600 million of preferred equity to increase the conservatism and heft of our balance sheet and to help fund our growth opportunities. The preferred stock is callable beginning in 2025."
One can of course understand the reason for these decisions by Markel, but when squared against what FFH did faced with the same unknowns and landscape, there were no equity issuance (preferred or common) at distress prices. They tapped their line of credit. I recall Amazon following dot.com crash but was largely applauded by raising debt right before and not issuing equity after the crash to survive. What do Amazon and FFH have in common, nothing except that both are led by founder-CEO-operator that cares a lot of his % ownership of the franchise. I don't know how much of Markel does T. Gayner has and i understand that issuing preferred shares are probably not as bad as issuing common equity but still.
Lastly, FFH took advantage of the situation:
"Net gains on bonds of $460 million includes net gains on corporate bonds of $474 million and net losses of $35 million on government bonds (inclusive of losses on treasury locks of $102 million). The majority of the gains on corporate bonds were from bonds purchased in the first and second quarters of 2020 when credit spreads widened."
"After the March/April crash in the stock market, we could not resist buying Exxon shares at a dividend yield of 10.5%, Canadian banks at an average yield of 6.1% and some other companies like Royal Dutch Shell, Alphabet, FedEx and Helmerich & Payne at very attractive prices. We sold approximately half of them in 2020 for a profit of $212 million or an average gain of 40% on our investment."
Now, both of these series of investments by FFH were probably done not with new money, but by re-allocation. But still i prefer that than Markel's liquidating 20% of its equity exposure.
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Couple of comments as we are approaching the AGM. I don't know when before 2020 FFH entered this arrangement with Chorus, but it showed their interest in the aerospace infrastructure asset.
"Fairfax invested Cdn$200 million in debt yielding 6% per annum and warrants which yield Fairfax an implied ownership of 13% in Chorus Aviation, which operates Air Canada’s Jazz regional airline business. Air Canada has a 9.6% stake in Chorus. There is no question that COVID-19 has been catastrophic for the airline industry. That said, Joe Randell and his team have done an outstanding job managing the cost structure of Jazz with its partner, Air Canada. Chorus is still being paid its fixed fee under the Air Canada contract. In addition, Chorus is currently seeing very exciting opportunities in the leasing space as all airlines, including the majors, look to move planes off their balance sheet. While our warrants are currently well out of the money (strike price Cdn$8.25 per share), we are confident the business of Chorus and its partner Air Canada will swiftly recover when travel once again resumes." FFH 2020 Letter for Shareholders
Reason i am bring this up is because not long ago, about in Q2 2020, Air Canada did a stock offering as well as convertible offering post-Covid crash. The convertible were told to be sold as a private placement. Of course it could be anyone buying, but given their previous interest in the sector, this would have been an interesting time for them to buy a piece of Air Canada at distress price (without needing 13F disclosure because it is convertible?). It could also be Brookfield Business Partners, given that it actually hired Air Canada CEO as a Senior Advisor and is looking at the aerospace sector very closely for investment.
"for aggregate gross proceeds of C$500,500,000 and its concurrent marketed private placement of convertible senior unsecured notes due 2025 ("Convertible Notes") for aggregate gross proceeds of US$650,000,000 (the "Convertible Notes Offering" and together with the Share Offering, the "Offerings"). The Convertible Notes will bear interest semi-annually in arrears at a rate of 4.000% per annum and will mature on July 1, 2025, unless earlier repurchased, redeemed or converted. The initial conversion rate of the Convertible Notes is 65.1337 Shares per US$1,000 principal amount of Convertible Notes, or an initial conversion price of approximately US$15.35 per Share. The Convertible Notes will be convertible into cash, Class A Variable Voting Shares and/or Class B Voting Shares of the Company or a combination thereof, at the Company's election."
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Not too contaminate this thread with Brookfield, but wouldn't the Canadian Pacific deal value for Kansas be more applicable for a smaller name like Genesee & Wyoming which is now under Brookfield. Given its smaller size, Genesee & Wyoming would be both marketable to a larger buyer and also the current owner's business is to flip.
Lastly, (i dont know if it was mentioned here), it was said on news that an earlier all-cash offer for Kansas by Blackstone was rejected.
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Sorry for late reply.
Was out of town.
When Blackstone carved out the quant division out of Reuters to merge it with London Stock Exchange, I saw the latter as a strategic co-investor.
Without it no deal was possible.
When ONEX bought WestJet that was entirely out of its funds (so Onex itself + its client), but 15 years before when they bought Beechcraft from the old Raytheon, they did it with Goldman Sachs with the latter as a co-investor.
Whenever you see Brookfield bought XXXX, i assume it to be through its funds (so its client + its own equity). But sometimes i believe when they have a strategic partner they mention them in the press release. For instance, believe Caisse was the co-investor in this case. I realize that the press release is (obviously) not saying anything who pays whom management fee.
https://www.bnnbloomberg.ca/brookfield-to-buy-johnson-controls-unit-for-us-13-2b-1.1167280
this is obviously speculation and how i kind placed these in my head
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ok maybe i am confused.
My understanding was that entities like Blackstone, Brookfield, Onex etc, when they invest in assets, there could be several different layers/ways of doing it.
(1) investing their fund (which has their client money + some of their own many); this is exposed to management fee and carry. Some of them like Onex have a much larger portion of their own equity into the fund, some which are more asset-light like managers have less.
(2) investing directly from their balance sheet alongside their own fund. Additionally, (as we have seen with Softbank), they could have their fund invested (in which they are also investor), but can also use their own balance sheet to bring in additional firepower. Effectively this allows the asset manager to get more of an upside for its own balance sheet at the expense of the management fee it charges the client.
(3) getting a co-investor to share the risk. So this would be completely outside the fund and the co-investor brings something that the asset manager doesn't have. In this case, I do not believe that the co-investor is paying the management fee/carry. They are implicitly "paying" because they are sharing the risk and maybe without them a Brookfield wouldn't want to go at it on his own. Call these cornerstone institutional investors.
So, in my head, i was kind of placing OMERS in the bucket #3 and not #1
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I agree with Pete's post except at this point the third-party capital is purely a guess. Based on what we know now it is not FairfaxAfrica/Brookfield-like asset manager model.
Which brings me to my earlier point that OMERS-like entity do not want to own FIH directly because (1) of the fees it pays FFH and (2) non-infrastructure asset exposure that it has like financials services companies and banks. Anchorage gives that freedom. It is no different than when Brookfield allows an institutional investor to invest alongside it, as oppose to that entity being part of a fund (which extract management fees)
Anchorage is defined as a "holding company" with permanent capital in the annual letter. So at this point it is no different than FIH as a close-end fund.
OMERS (and others in the future) are coming in as equity shareholder with permanent capital. OMERS will own 11% of Anchorage, which currently has only the airport, but will be a 11% owner of everything else Anchorage might invests in the future. Then FIH can either sell more of its 89% stake to other OMERS like entity or (unlikely) issue equity at Anchorage-level.
I do recall Prem Watsa accidently blurting out the word "Brookfield" in Q3 or Q4 2019 conference call when discussing India. Transforming his business into an asset manager with third-party capital would bring much needed dry powder. Specially now that Government in India is unloading assets. Saw an article on WSJ just now saying Shipping Corp of India is on the block. Of course us being here in the West, probably do not see the whole scale.
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Sorry Bryggen
i don't know much about these conferences.
otherwise i would have commented it.
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Thanks for the link,
Very much in line with what we have been hearing from Brookfield, that cash strapped government post-pandemic will be looking to offload assets.
Brookfield has third-party capital and dry powder to deploy while Fairfax India somewhat lacks in that area. i.e. FIH has permanent capital that was more or less fully deployed and equity issuance is out of options.
The solution is Anchorage. Interestingly, I think as a 'product', the equity of Anchorage is really geared toward institutional investors (i.e. pension), who want the India infrastructure as pure-play but do not want to own it through FIH, where (1) it pays fees to FFH (2) has financials in the portfolio.
When a pension fund buys into the equity of Anchorage, effectively, they own the best piece of FIH but without the fees that it pays to FFH.
Of course, that also means that Anchorage would have an overhead and management team that need to procured or outsourced back to FIH.
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Understood, let's just say i am a romantic for anything related to Canadian North and Arctic.
In fact was also looking into going up to Churchill next year maybe.
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Not happy about this.
Not saying this was a crown jewel.
But i do recall at the 2018 AGM, management talking about the potential some decades down the road, as the Arctic opens up for trade, and how they had very limited exposure for a large upside. Two years later it is all gone.
I guess if Masayoshi Son can be forgiven to shrink his 300 years vision into managing quarterly results and shorter 5 year timeframe, than we can forgive Fairfax for letting this go. If it was a substantial financial gain maybe that make sense, but they are not disclosing, which means it was not.
Q1 2021
in Fairfax Financial
Posted
Agreed on timeline.
The only concern is that the strategic sucker who will take the other side of the trade must know enough about the cyclicality of the business, to be wary to pay premium on top of the market. I just hope Fairfax are being creative to hedge somehow the upside gained thus far.