A_Hamilton

$350 million. I agree there is an outstanding risk control question of how big of a position they will take in a given company as a % of FFH's equity and it isn't reassuring that Prem gives a poor seat of the pants answer. With that said, however, there is a large difference between another $500 million in BBRY equity and another $500 million in BBRY debt. Thanks for the cost base in BOI. I agree there is a huge difference between debt and equity. Risk is much less. It's the position size that bothers me. I would say my biggest issue with BBRY is that they took a huge equity position (when they had the Total Return Swaps on BBRY as well) relative to FFH's equity. That made absolutely no sense.

$350 million. I agree there is an outstanding risk control question of how big of a position they will take in a given company as a % of FFH's equity and it isn't reassuring that Prem gives a poor seat of the pants answer. With that said, however, there is a large difference between another $500 million in BBRY equity and another $500 million in BBRY debt.

I just don't get it. They have now invested 1.38bln! Think about the opportunity cost of that money in todays market. Opportunity cost? Where else are they getting seven year notes at 6% that are effectively first lien notes with an equity kicker? As a total aside, maybe not relevant to this discussion maybe it is, FFH now has over $1 billion invested in Bank of Ireland.

1.) You are correct. They are unlikely to redeem. Also, I think they think low rates are here to stay, so the option to convert the prefs isn't worth much. 2.) I contend that these prefs are an inexpensive way for them to 1.) get capital and 2.) short the Canadian dollar.

Why? They went from being a 10% equity holder to being a holder of $500 million in what are effectively first lien notes and 10% equity holders. This thing goes belly up the whole EV only needs to be $1.25 billion for them to be whole on the notes.

Perhaps smaller position sizing is the way to go w longer duration. I'm a chicken for the long bond duration trades! 10 year CD w/ a coupon 60 bps over treasuries is scary enough!

I'm looking at buying some ten year US government guaranteed instruments as a hedge against deflation. I can get: 10 year zero: 2.82% (10 year duration) 10 year treasury: 2.69% (8.8 year duration) 10 year FDIC backed CD: 3.307% (CIT or GE; 8.6 year duration; fully saleable on the secondary market) I'm shocked by the huge spread CD's trade to treasuries. I like the CD option but am afraid that this spread to treasury's won't close (or could rise) if deflation hits and I won't get the same price appreciation on the CD as I might on a treasury if 10 year treasury yield decline say 100 bps. Any thoughts here? Thank you. AHamilton

I think it's pretty obvious why they raised capital. Read the rating agencies' reports on the company. They want FFH to be at <30% Debt to Capital. At the end of the Q they were at 28.4%. Now they have extra BBRY loss post Q, thanks to the brilliance of equity accounting FFH will be taking a large hit next Q to its carrying value in RFP (RFP had a massive writedown of its DTA this quarter), and the company's bond portfolio is very volatile with its long duration in a low rate environment. Add to this the fact that FFH told the rating agencies no more capital in BBRY, and the agencies issued statements saying no change in FFH's rating based on this statement, and the rating agencies were likely pissed when FFH added $250 million to the name. Notice S&P only issued its affirmation/no credit negative on the BBRY deal after FFH announced the offering? I doubt the timing was a coincidence. This is all a bummer because FFH doesn't need more capital and our earnings power took a modest hit because the rating agencies can have major detrimental effects on FFH if FFH doesn't adhere to what the agencies want them to do. Look at other items and you'll see it. Rating agencies demand $1 billion in liquidity at hold co., agencies demand that there be a centralized risk figure so FFH buts Andy Barnard in that position (though he was probably doing some of this anyway). Who knows maybe some of these things are good, but this capital raise was definitely a submission to the rating agencies.

From a term sheet I received this morning from BMO, text of which I pasted here: http://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/ffh-at-multi-year-high/msg139809/#msg139809 Thanks for that. Was looking at my BB terminal and scratching my head.

Gross proceeds of CAD $431 million. You don't know what fees they are getting... A single institution is purchasing 30% of the $431mm (presumably at the $431/share), so only 700,000 shares to be sold to the public where the brokers are actually taking price risk. On the public tranche there is a 4.0% fee, and on the committed inst'l tranche there is a 1.0% fee. So total fees between the two tranches will be $13.4m, or roughly $19/share of fees on the public risk tranche. So the brokers' "cash breakeven" price on the shares is around $412/share. Any source for the above? Thank you.

Gross proceeds of CAD $431 million. You don't know what fees they are getting...

No clue. But for point of reference, there is still Exxon Valdez litigation going on. That incident was I believe in 1989. There is still asbestos litigation and that has been going on for 30-40 years. I'm not saying this has anything to do with those things or even that it's similar. But litigation can sometimes go on endlessly if the parties want it too (i.e. can't reach any kind of agreement). I know this is all too late and maybe they didn't foresee the risk, but why wouldn't your agreement with the Fed (BSC) and FDIC (WaMU) specifically state that those entities were responsible for any successor liability. Huge oversight.

How did you arrive at 13%? CAD $420/CAD $370

"I would much rather see them pay 500 million toward a great investment that immediately put 75 million a year on the balance sheet than turn arounds. BBRY, Torstar, Sandridge, Resolute are all weak businesses with no moats, and in a couple of cases very dubious management. They have billions tied up in these kind of mediocre operations. 2 billion invested in a Mullen or Russell would provide cash flow immediately to their balance sheet. When the shit hits the fan they could deploy that cash flow, as Buffett does. It is now time for Fairfax to use their size and power to advantage. " What about BKIR ID, KW Convertible Preferred's, International Coal, gains on LT bonds over the last 5 years. Haven't these all worked out well? The real pain for FFH has been hedges (which could be transitory), greek bonds (a $300 million mistake no one seems to even know about and for which FFH's hubris in thinking that CDS would never be triggered ever again/thinking the Eurozone would bail these out at 100 cents on the dollar absolutely hammered them), and the total return swaps long that FFH had on BBRY in the mid-$20's that were converted to equity at $7-$8 per share. Your complaint seems very what have you done for me lately.

Forest City. They have owned it for years. They owned it when it traded at $70 in 2006 and years before that. They still own it and now it is at $19. What do they see in this company and what discount rates do they use on the properties that allow them to be a holder at both $60 and $19. Just seems like there is no valuation work being done there.

Anybody know what the maximum Prem and Co. have mentioned as a % of shareholders' equity that they would be willing to put into one name? I thought BBRY was already near/at the maximum.

Wonder how this effects the pension plan assets/liabilities.

I'm not sure it does earn above average returns over time. LUK bought national beef because it has been a stable CF generator, and has the added benefit of being an LLC which means lots of cash comes back to LUK untaxed. This allows LUK to begin monetizing its massive DTA.

Not necessarily...I just have other wood products holdings that I like better.

I did a call with these guys right before OSB prices doubled. I was asking all kinds of questions about the company and they started asking me whether I was interested in the company's equity or debt. I said the equity and they sounded floored, I don't think anybody had considered the possibility that the company could continue on much longer without prices increasing or a substantial reorg of the capital structure. Anyway, I couldn't find a way to buy in the volume I needed and I just didn't do it...#regrets

I think Uccmal may have been referring to several events in the aggregate. A billion for the floods alone is extremely speculative. Based on Odyssey's annual report, 3% of GPW are concentrated in Canada ($82 mm). Northbridge will take a hit, but they write about a billion total. Recall that Sandy is estimated to cost Fairfax $261 mm (and Odyssey wrote at 88.5% despite this) and the industry $25-30 b. Uccmal, I'm curious how you come up with your estimate? A 1% increase in Northrbidge's combined ratio was $9.9 million pre-tax at 12/31. So even to get to a half a billion dollar hit to BV you'd need to write at ~170% combined ratio at NB for the year...

Where did you get that data? I'm not saying you're wrong. I'm just curious. It'd be cool if you had some big trove of data on the industry. ;D No, I don't have the data for that. I believe Nielsen (Nielson?) has some of this data. It was in an old credit suisse report that I have on the company.

And guess what they do when they do trade to premium, they dilute you by issuing more stocks. CIM is the classical example, at the end of 2008, it's arguably positioned to deliver awsome returns in the following years, and some of the early re-remics they did had ridiculous economics, but on the back of that, they grew market cap from something like $200MM to $2 billion. So what would have been 40-50% type of IRRs if they didn't do any follow on capital raise gets diluted down to the low teens. The managers are not incentivised to optimizing IRR's, but maximizing AUM's. These things are there to give retail investor access to mortgage carry. There is a time and place for it, but arguably not today. HJ great post. Same feelings I had on NYMT which I owned in the depths of the crisis...they did these great deals and then diluted the crap out of everyone.

Wrigley. Gum has the highest gross margin per linear inch of shelve space of any item in the grocery store.

So is the whole point of this that Biglari is upset that no one can figure out the financials due to the consolidation of his investment partnership and this makes the financials "clean" again? He'll go from having a $415 million market cap with $400 million in BV to $440.5 million in BV even though nothing has changed.