Fairfax Complete Senior notes offering

[Partner24]

http://money.cnn.com/news/newsfeeds/articles/marketwire/0528995.htm

 

"As a result of this offering, we have increased the cash and marketable securities in our holding company to in excess of US$1 billion. These additional funds give us increased flexibility, including the ability to repay debt and other obligations from time to time. This Canadian dollar bond offering is also a natural economic hedge for our Canadian dollar assets, in particular our 100% interest in Northbridge Financial. As we have said many times previously, we are committed to maintaining outstanding financial strength by always having a substantial cash and marketable securities position at the holding company level."

 

 

[Partner24]

Some highlights from these Prem's comments:

 

- we have increased the cash and marketable securities in our holding company

 

- These additional funds give us increased flexibility, including the ability to repay debt and other obligations from time to time.

 

- we are committed to maintaining outstanding financial strength by always having a substantial cash and marketable securities position at the holding company level.

[ERICOPOLY]

Some highlights from these Prem's comments:

 

- we have increased the cash and marketable securities in our holding company

 

- These additional funds give us increased flexibility, including the ability to repay debt and other obligations from time to time.

 

- we are committed to maintaining outstanding financial strength by always having a substantial cash and marketable securities position at the holding company level.

 

 

Increased flexibility to do what, eh?  Spend a big chunk of the money already in holdco ;)  Then, the new slug of money is useful for debt repayement, and other obligations from time to time.

 

Come on, they just told us (on August 1st) that they were already comfortable with holdco... I call as my witness Greg Taylor:

 

 

http://seekingalpha.com/article/153023-fairfax-financial-holdings-limited-q2-2009-earnings-call-transcript?page=6

 

our holding company liquidity remains very strong, almost no change from the first quarter. We have cash and marketable securities at the holding company up $880 million, $863 million net of liabilities.

 

This $880 million or the $863 million, just note for you, is greater than the $858 million and Fairfax bonds that are outstanding, very important to note. All of our capitalization ratios remain very strong. At the operating companies, as I have shown you all the companies have very strong capital ratios.

 

On a consolidated basis Fairfax’s shareholder’s equity increased to $5.6 billion from $4.9 billion at the year-end. That is up 13% year-to-date. As a result, you'll see that Fairfax's debt-to-capital ratio improved to 22.6% that was 23.7% at 2008 year-end.

 

And then finally our debt maturity profile, you will see that we have no major debt maturities until 2017. Obviously, we have very low refinancing risk in these markets in addition to our very substantial cash resources at the holding company.

[Cardboard]

That is a lot of chatter from Prem on the closing of a debt offering. I have looked at previous press releases: 2012 debt exchange offer, Crum & Forster debt issue, etc. and there was not much talk. None at all.

 

"On November 19, 2008, Mr. Watsa had a discussion with Mr. Smith during which he advised Mr. Smith that Fairfax would not be willing to sell its Shares if another party made an offer for Northbridge. On November 20, 2008, Mr. Watsa met with Mr. Smith to share his views on the appropriate valuation metrics for the Shares. During that discussion, Mr. Watsa expressed his view that an appropriate premium for the Shares would be 20% above the most recent 30 day volume weighted average trading price (which represented approximately $36.00 per Share)."

 

What is he trying to do? Bring down ORH share price so he can make an offer for $50? Intentional or not, this extra talk surely hurts the Odyssey Re buyout theory which may have helped this nice and well justified share price advance in ORH due to excellent results and large growth in book value.

 

Prem Watsa is a wealthy man. I am not yet, so I will look for my own interest first and foremost. This means that even if there is no offer for Odyssey Re that I will keep holding my position until I realize at least a decent price. Book value is around $55 today, no longer $51.90 (operating income, unrealized investments gains, buying back shares below book). At $47 and change it is a deal and should not trade there. With Odyssey Re continuing to buy back shares at a fast pace and good results, the pressure is on supply and demand for these shares.

 

Regarding the share repurchase authorization of $600 million, there was only $85 million left as of July 29 or following the July repurchases. That is about 1.8 million shares. Fairfax held 72.5% of ORH as of July 29. Remove another 1.8 from outstanding and they are now holding 74.8%. This means very little float left especially when you consider that many are long term holders.

 

Remove another 3.65 million shares and now they hold 80% and ORH is again part of the Fairfax U.S. tax group. Beneficial or not at this point, I don't know, but it will become a consideration going forward.

 

Cardboard

[ERICOPOLY]

During that discussion, Mr. Watsa expressed his view that an appropriate premium for the Shares would be 20% above the most recent 30 day volume weighted average trading price (which represented approximately $36.00 per Share)."

 

The appropriate fair price for FFH is only about $300, if an offer was made 30 days ago.

 

Forget tangible present book value (reflecting investment gains since last reporting period) and intrinsic value... that stuff doesn't determine what a fair price is.  No, Mr. Market is the analyst to be relied on.

 

If he pulls that kind of a stunt right now, I'm afraid the buyout price would be about $55... or present book value.  Very fair of course!

[valuecfa]

At current market valuations/environment, I wouldn't tender any Odyssey Re shares for less than $68/share. But that is me. I am perfectly happy with ORH's progress as a stand alone company. I also don't expect any buyout of ORH this year (but who knows), as future near term investment gains won't be of the magnitude of the past year, in which to allocate to such a major investment. The less float/remaining shares in ORH as the buybacks continue over the quarters/years, the more FFH would be willing to offer in premium for ORH. I think they would be more likely to pay a higher premium, closer to 1.3x book value if there were only 10% remaining float vs. 25-28%.

[Cardboard]

FYI, this debt offering has been more than well received. They priced it at $99.639 and it is already trading above par or at around $105. No wonder that they were able to raise the offering from $150 million to $400 million in less than 24 hours.

 

I hope that they will be receiving something down the road from the various investment bankers for the nice gift: a $22 million distribution cut + $2.9 million in fees.

 

Cardboard

[ERICOPOLY]

FYI, this debt offering has been more than well received. They priced it at $99.639 and it is already trading above par or at around $105. No wonder that they were able to raise the offering from $150 million to $400 million in less than 24 hours.

 

I hope that they will be receiving something down the road from the various investment bankers for the nice gift: a $22 million distribution cut + $2.9 million in fees.

 

Cardboard

 

$24.9m cost --  that is 6.225% already that this has cost them, or 13.725% pre-tax over the next 12 months.

 

Considering that they don't need any more money at holdco per Greg Taylor's Aug 1st comments, that is bizarre.

 

 

[Cardboard]

Now, compare it with this offering from Watson Pharmaceuticals also issued today.

 

http://www.reuters.com/article/marketsNews/idINN1856117620090818?rpc=44

 

Same maturity (tranche two) and same total, but in USD and both unsecured. Watson is paying 6.125% and issued them at $99.796 vs Fairfax paying 7.5% and issued them at $99.639. On top of that, the debt offered by Watson has been rated as junk by Moody's, S&P and Fitch while Fairfax is investment grade.  ???

 

Was this rushed or something? How badly do they need this money?

 

Cardboard

[Nnejad]

Something which struck me today. . . If and when Fairfax exercises their warrants, it will have to consolidate the Brick onto its financial statements.  Nothing to sneeze at. . . an extra 1 billion++ a year in sales plus related working capital/assets.  So perhaps 400 million Canadian is to be prepared with liquidity for the increasing Canadian nature of their business (Northbridge, Ridley's, Brick . . .)

[Rabbitisrich]

Don't Canadian companies use proportionate consolidation? Even so, that's an interesting point about the outsized balance sheet effects relative to the investment size.

 

Can someone better versed in Canadian GAAP explain the effects of consolidation on statutory capital?

[valuecfa]

If they consolidate Brick, then it will negatively effect the balance sheet, given that the company has a net deficit in equity. 

[Cardboard]

Weather they consolidate or not investments where they own a significant percentage does not bother me too much. What concerns me however, is return earned by these businesses.

 

Ridley for example looks terrible so far. It made $3.4 million in operating income in the first half on $271.3 million in revenues and shows a loss in the 2nd quarter. I thought that Lindsey Morden could have been enough of a lesson.

 

What is potentially next in the pipeline after Brick: Mega Blocks, Canwest Global and Abitibi-Bowater. We are talking about companies restructuring their debt, with businesses in secular decline or undergoing major turnarounds.

 

I don't understand how this company can be so successful in the stock market, but when it comes to buying 20% or more of a firm that it almost always turns into a flop. On the other hand, they hesitate to buy something like Odyssey Re which they know inside and out and for which they know their money will earn a great return. They did not lose buying Northbridge you know.

 

What I also find intriguing is some people being all concerned about Fairfax deploying a lot of cash in Northbridge or for Odyssey Re and the impact it could have on depleting the big cash cushion, but they show no concern whatsoever when they plug $500 million into a sink hole such as Abitibi-Bowater. What insight did they truly have into the newsprint business to commit half a billion dollar? Probably one of the worst managed companies I have ever seen.

 

Cardboard

[valuecfa]

Weather they consolidate or not investments where they own a significant percentage does not bother me too much. What concerns me however, is return earned by these businesses.

 

Ridley for example looks terrible so far. It made $3.4 million in operating income in the first half on $271.3 million in revenues and shows a loss in the 2nd quarter. I thought that Lindsey Morden could have been enough of a lesson.

 

What is potentially next in the pipeline after Brick: Mega Blocks, Canwest Global and Abitibi-Bowater. We are talking about companies restructuring their debt, with businesses in secular decline or undergoing major turnarounds.

 

I don't understand how this company can be so successful in the stock market, but when it comes to buying 20% or more of a firm that it almost always turns into a flop. On the other hand, they hesitate to buy something like Odyssey Re which they know inside and out and for which they know their money will earn a great return. They did not lose buying Northbridge you know.

 

What I also find intriguing is some people being all concerned about Fairfax deploying a lot of cash in Northbridge or for Odyssey Re and the impact it could have on depleting the big cash cushion, but they show no concern whatsoever when they plug $500 million into a sink hole such as Abitibi-Bowater. What insight did they truly have into the newsprint business to commit half a billion dollar? Probably one of the worst managed companies I have ever seen.

 

Cardboard

 

 

What do you really think, Cardboard.  :D lol

 

Whether they consolidate or not certain investments is no big deal. It will effect the reported book value, income statement, and this and that, but I'm sure they don't judge their equity investments by the effect it will have on the reported GAAP accounting numbers. At least they shouldn't. I'm sure its the cash they care about.

 

They definitely made mistakes with those investments you mentioned. It seems when the company goes distressed shopping in non-U.S. markets it doesn't work out as well. These are distressed investments, and some such as Brick need more time to determine whether or not they will be successful. I do think Fairfax has to take a loss sometimes, instead of continuously plowing money into sinking ships, when they realized that a company is broken. Not all distressed investments work out. If they did work out, we would be calling them a genius, but it is a difficult type of investing which usually results in either a homerun or a total loss.

[Smazz]

Now, compare it with this offering from Watson Pharmaceuticals also issued today.

 

http://www.reuters.com/article/marketsNews/idINN1856117620090818?rpc=44

 

Same maturity (tranche two) and same total, but in USD and both unsecured. Watson is paying 6.125% and issued them at $99.796 vs Fairfax paying 7.5% and issued them at $99.639. On top of that, the debt offered by Watson has been rated as junk by Moody's, S&P and Fitch while Fairfax is investment grade.  ???

 

Was this rushed or something? How badly do they need this money?

 

Cardboard

 

That were my thoughts also - I mentioned this in another thread or post (Cant remember) though I did not use the Watson example.

 

 

 

 

 

[Partner24]

I try to not comments on specifics decisions. I give a bat, watch the show and comment on the average.

 

Cigar butts, value traps, however you call them...those are the kind of things that FFH has fallen into in their history. I'm far from being a fan for garbages that look like potential diamonds. One of the best way to describe value traps might be the midnight clock in the Cinderella story:

 

She turned a pumpkin into a coach, mice into horses, a rat into a coachman, and lizards into footmen. She then turned Cinderella's rags into a beautiful gown, complete with a delicate pair of glass slippers.

 

http://en.wikipedia.org/wiki/Cinderella

 

Always remember that time is the friend of the great businesses and the enemy of the mediocre. When the clock ticks twelve times, the coach becomes a pumpkin, the horses become mice, the coachman become a rat and the footmen become lizards.

 

Yes, there is some very rare exceptions to this, especially where there is a localized cancer and you have very skilled surgeons to remove it, but this is the exception and nearly 100% of people that fall into these traps might think that they have found the exception.

 

Now, that being said, Fairfax, despite their usual potholes, have created overall some terrific wealth over time. Some of their stuff work, some of their stuff don't. What is important to them is to realize where they are very good at and where they are not good at. To rinse their cottage cheese, to learn from their mistakes and to focus on where their genius spot(s) is (are). That's one of the ingredients to become a greater company over time.

 

Regarding that ORH buzz, like I said before, the FFH capital allocation decisions universe does not start and end with the remaining ownership of ORH.

[Partner24]

And one the lessons I think they've learned in their 7 lean years is to maintain a high financial flexibility. So if they want to use that $ to extend their maturities and to increase furthermore their $ and liquid investments at the holding company level, then (to me) be it. I'll applause anyway. I'm not expecting any particular thing regarding that $.

 

"Overcapitalized" might be one of the sweetest comment that I've heard regarding Fairfax. So I'm looking forward for FFH to keep being "overcapitalized" for a very long period of time  ;)

 

 

[Myth465]

Cardboard, I must say you are probably the most consistently critical member of this board when it comes to FFH and I like it. Also something thoughtful, keep it up.

[valuecfa]

Cardboard, I must say you are probably the most consistently critical member of this board when it comes to FFH and I like it.

 

Me too. I love to see rational criticisms.

[SharperDingaan]

 

You might want to consider that if FFH did go for ORH, most of the consideration would very likely be paid in FFH common (tax free roll-overs etc.). If theres a lot of new FFH equity out there, FFH is going to need some more term debt to keep the ratios in line.

 

SD

[Cardboard]

"...if FFH did go for ORH, most of the consideration would very likely be paid in FFH common (tax free roll-overs etc.)."

 

Considering the current trading prices of both, it would make a lot of sense IF Fairfax was very agressive with its money at holdco. They are not that agressive however.

 

There was $863 million net at holdco on June 30 and just over 37% of it is in stocks and derivatives. That is a bit more than what you will find at the insurance subs (just under 30%), but not much more. Considering the holdco debt maturities and that they receive fees and dividends from the subs allowing to support interest payments, I would prefer Fairfax to invest close to 100% of this amount in their very best ideas and to hedge.

 

This portion of Fairfax would then turn into a small hedge fund with investments earning close to 20% a year (or more?) financed with long term fixed rate debt at around 7%. IMO, this would undoubtedly become Fairfax most profitable division. And if something bad were to occur, you liquidate a portion which is hedged or effectively keeping the same big cushion as you have now.

 

However today, with most holdco investments in cash, treasuries and bonds, I believe that using a good chunk of it to finance a big purchase like ORH makes sense based on return on capital.

 

Cardboard