Fairfax India new issue

[longlake95]

FIH is a beach ball under water that’s slowly being filled with air, eventually it will “pop” up. When that happens who knows? The BIAL is a direct beneficiary of India’s growth. 
 

Indigo airlines of India ordered 500 airplanes.

https://www.reuters.com/business/aerospace-defense/airbus-wins-historic-500-plane-indigo-order-2023-06-19/

[Xerxes]

I am going to get shot for saying this in an FIH related thread. But I would be careful of these orders you see coming out of Paris Air Show. 
 

Just like when the automakers were falling over themselves to place POs for chips few years ago, you have the same phenomena happing in the aerospace industry. Lots of airlines FOMO buying production slots in the out years of 2030s.  
 

Take it for what it is, the directionality of India trajectory. But that is about it. 

[longlake95]

14 minutes ago, Xerxes said:

I am going to get shot for saying this in an FIH related thread. But I would be careful of these orders you see coming out of Paris Air Show. 
 

Just like when the automakers were falling over themselves to place POs for chips few years ago, you have the same phenomena happing in the aerospace industry. Lots of airlines FOMO buying production slots in the out years of 2030s.  
 

Take it for what it is, the directionality of India trajectory. But that is about it. 

Yes Xer, you’re right they are buying “options” on airframes in many cases. I do know (from industry contacts) between growth and a bulge of airframes reaching end of useful life globally, there’s a good chance they take delivery of these airframes or sell to someone else who takes delivery. Not withstanding COVID, airlines have sweat the hell out of these airplanes, there is now a trend to moving to “larger” narrow body airframes. So net net it looks favourable. 

Edited June 23, 2023 by longlake95

[brk64311]

20 hours ago, MMM20 said:

Oof, I hope you're wrong about that @brk64311 b/c that's where I own Exor (and would own FIH). I thought the IRS instructions were clear that individual retirement plans are not taxed as shareholders of PFICs, but I am not a tax guy or lawyer...

 

 

https://www.irs.gov/instructions/i8621

However, a U.S. person that owns stock of a PFIC through a tax-exempt organization or account described in the list below is not treated as a shareholder of the PFIC.

• An organization or an account that is exempt from tax under section 501(a) because it is described in section 501(c), 501(d), or 401(a).

• A state college or university described in section 511(a)(2)(B).

• A plan described in section 403(b) or 457(b).

• An individual retirement plan or annuity as defined in section 7701(a)(37).

• A qualified tuition program described in section 529 or 530.

• A qualified ABLE program described in section 529A.

 

https://www.bogleheads.org/wiki/Passive_foreign_investment_company

"First, the Final Regulations modify the definition of shareholder as announced by the US Treasury and the IRS in Notice 2014-28, whereby a United States (US) person shall not be treated as a shareholder of a PFIC to the extent such person owns PFIC stock through a tax-exempt organization or account. This effectively extends the exemption that was already afforded to the tax exempt organization under the temporary and proposed regulations to the US shareholder(s) of such organization, and expands the exemption to encompass tax exempt accounts as well. As a result, for instance, a US person owning stock of a PFIC through an individual retirement account (IRA) described in Section 408(a) will not be treated as the shareholder of the PFIC stock, and in turn, is not subject to the PFIC rules. Because Notice 2014-28 originally provided for the aforementioned exemption, it will be effective for the taxable years of US persons who own stock of a PFIC through a tax-exempt organization or account ending on or after December 31, 2013."

 

 

MMM20, I think you are right. I was under the (wrong )impression that rollover IRA is subject to ERISA, which will not allow PFIC holdings.   Thank you.

 

 

 

 

[exege]

Quote

Yes Xer, you’re right they are buying “options” on airframes in many cases. I do know (from industry contacts) between growth and a bulge of airframes reaching end of useful life globally, there’s a good chance they take delivery of these airframes or sell to someone else who takes delivery. Not withstanding COVID, airlines have sweat the hell out of these airplanes, there is now a trend to moving to “larger” narrow body airframes. So net net it looks favourable.

 

 

Usually order aircraft announcements are further detailed into "firm orders" and "options". Firm orders kick-off the supply chain long-lead items and configuration, while options only reserve production slots. The Air India Paris Air Show announcement just finalizes a previously announced order from back in February of this year. As Xerxes says, orders get cancelled, slots get assigned to other carriers, and delivered jets get sold if they are excess to capacity needs. I used to work in aircraft design and we would be shown charts of production slots with orders at weekly meetings that constantly changed.

Edited June 23, 2023 by exege

[MMM20]

1 hour ago, brk64311 said:

MMM20, I think you are right. I was under the (wrong )impression that rollover IRA is subject to ERISA, which will not allow PFIC holdings.   Thank you.

ok, good… FIH still near the top of my wishlist 

 

 

Edited June 23, 2023 by MMM20

[Haryana]

On 6/23/2023 at 8:58 AM, exege said:

The Air India Paris Air Show announcement just finalizes a previously announced order from back in February of this year.

https://www.msn.com/en-in/lifestyle/travel/india-show-stopper-at-paris-air-show-air-india-finalises-mega-deal-for-470-planes/ar-AA1cQbgK

The agreement, initially outlined in February, represents the largest-ever plane order in terms of the number of aircraft. This record-breaking achievement comes hot on the heels of a similar milestone set by Indian rival, IndiGo, which recently placed an order for 500 Airbus narrowbody jets. The finalized contract not only boosts Air India's standing in the aerospace industry but also underlines India's robust demand for air travel, driven by a rapidly growing population.

[Luca]

Fairfax-India-AGM-2023 (1).pdf

 

For some reason i have trouble finding this on the internet again so i will post it here just in case they removed the presentation. In case somebody didnt have a look, its a nice overview of FIH. 

[Luca]

Assuming India as a country lifts off and the picks in Fairfax India continue to compound well over the next decade, the discount should close, we get the closure to 1x Book and the Book Value return. Fees will eat up returns of the closure to book value so one could say at current valuation and closure in year 10, we are getting the pure returns by Fairfax India for free. Looks like a pretty nice bet.

Edited June 26, 2023 by Luca

[dartmonkey]

Quote

Fees will eat up returns of the closure to book value so one could say at current valuation and closure in year 10, we are getting the pure returns by Fairfax India for free. Looks like a pretty nice bet.

 

Not exactly. Book value is now $18.85 per share by my calculation (March 31st equity $2,598,273,000; shares 137,815,952), share price $13.65, but don't forget the fees have already been paid for book value up to . Fees are paid based on book value, not share price, and they are 1/5 of BV increase beyond a 5% annually (this December 31st is the end of the 3rd 3y calculation period). They are paid every 3 years if book value is higher than the previous highwater mark, but (I think) not reimbursed if there is a book value drop. But they are accrued, based on each trimester's BV, and as of March 31, there was a fee accrual of 20c/share. In other words, there is 20c per to be paid if book value on December 31st is the same as it is now. But whether the share price climbs up to book value of not makes no difference to the fee.

[Luca]

31 minutes ago, dartmonkey said:

 

Not exactly. Book value is now $18.85 per share by my calculation (March 31st equity $2,598,273,000; shares 137,815,952), share price $13.65, but don't forget the fees have already been paid for book value up to . Fees are paid based on book value, not share price, and they are 1/5 of BV increase beyond a 5% annually (this December 31st is the end of the 3rd 3y calculation period). They are paid every 3 years if book value is higher than the previous highwater mark, but (I think) not reimbursed if there is a book value drop. But they are accrued, based on each trimester's BV, and as of March 31, there was a fee accrual of 20c/share. In other words, there is 20c per to be paid if book value on December 31st is the same as it is now. But whether the share price climbs up to book value of not makes no difference to the fee.

What i meant is that if Fairfax India keeps compounding nicely, i think the book value will get back to something around 1x book from the current 0.7x book. So we wont only capture the book value gains after fees but also the closure of the discount. I hope my logic is understandable. 

 

So for me, buying this for way less than book gives possible extra returns, if India and Fairfax India gets in favor after outperforming in a decade or so. 

Edited June 26, 2023 by Luca

[Haryana]

A simpler way of what you were trying to convey could be as follows:

 

Those who are concerned about that fee structure of FairfaxIndia should understand that the fee has already been paid upto the book value of ~$18 and it applies only on returns in excess of first 5%.

 

So, if the book value grows at only 5% per year average over the triannual periods for the next 10 years and the discount closes in the mean time, the ending stock price will be ~$30 and almost zero fee will be paid over these 10 years. The triannual averaging may ease the book value volatality.

 

This means a return of about 8% per year assuming a conservative increase in book value of only 5%. Now, if you get a higher book value increase than 5%, leading to some fee having to be paid, then your stock return can be higher than 8%, then will you really have that fee to complain about?

 

[Luca]

33 minutes ago, Haryana said:

A simpler way of what you were trying to convey could be as follows:

 

Those who are concerned about that fee structure of FairfaxIndia should understand that the fee has already been paid upto the book value of ~$18 and it applies only on returns in excess of first 5%.

 

So, if the book value grows at only 5% per year average over the triannual periods for the next 10 years and the discount closes in the mean time, the ending stock price will be ~$30 and almost zero fee will be paid over these 10 years. The triannual averaging may ease the book value volatality.

 

This means a return of about 8% per year assuming a conservative increase in book value of only 5%. Now, if you get a higher book value increase than 5%, leading to some fee having to be paid, then your stock return can be higher than 8%, then will you really have that fee to complain about?

 

Well said

[dartmonkey]

1 hour ago, Luca said:

What i meant is that if Fairfax India keeps compounding nicely, i think the book value will get back to something around 1x book from the current 0.7x book. So we wont only capture the book value gains after fees but also the closure of the discount. I hope my logic is understandable. 

 

So for me, buying this for way less than book gives possible extra returns, if India and Fairfax India gets in favor after outperforming in a decade or so. 

 I think we agree, although you and I are both having trouble with typos! You mean it will compound nicely, if the share price (not book value) gets back to something around 1x book, right? And as Haryana more clearly put it, there are no fees (or, more precisely, only 20c of fees) up to the most recent book value, and only 1/5 of book value gains beyond 5% per annum, for book values higher than $18.85/share. 

 

Lots of asset managers and their shareholders have to live with share prices below asset value: Pershing Square is another good example. So a return of the share price to 1x book may be a bit optimistic, although of course it would boost returns a lot if it ever happens. But even if it doesn't, and we only track BV, returns are already not bad - despite a few lost years from the COVID scare and its devastating effects on the airport, along with a weakening rupee, BV growth per share was 8.5% up to last December. Even without a share value:book value narrowing, I could live with 10% BV growth, and won't begrudge Fairfax from taking one of those percentage points for its fee.

[Luca]

29 minutes ago, dartmonkey said:

 I think we agree, although you and I are both having trouble with typos! You mean it will compound nicely, if the share price (not book value) gets back to something around 1x book, right? And as Haryana more clearly put it, there are no fees (or, more precisely, only 20c of fees) up to the most recent book value, and only 1/5 of book value gains beyond 5% per annum, for book values higher than $18.85/share. 

 

Lots of asset managers and their shareholders have to live with share prices below asset value: Pershing Square is another good example. So a return of the share price to 1x book may be a bit optimistic, although of course it would boost returns a lot if it ever happens. But even if it doesn't, and we only track BV, returns are already not bad - despite a few lost years from the COVID scare and its devastating effects on the airport, along with a weakening rupee, BV growth per share was 8.5% up to last December. Even without a share value:book value narrowing, I could live with 10% BV growth, and won't begrudge Fairfax from taking one of those percentage points for its fee.

Yes agreed 

 

I think in FIHs case the discount should even be more narrow since they also own private companies unavailable to us. Pershing Square Holdings can just be cloned and bought directly. I guess over time with good performance the market will take notice. If not also fine. 

 

Does anybody know how the tax rules for this vehicle are? 

 

Do they pay taxes when their stakes issue dividends? How is that situation in India?

 

 

[rohitc99]

Outside of the BIAL, the other companies such as IIFL and other financials (~ 30% of the book value) are doing quite well. Some of them are growing 25% for now. When the biggies like ICICI bank can grow assets for now at 20%, the smaller companies in the financials space can do better

 

So a 15% annual growth in book value is not a very high bar

[nwoodman]

On 6/20/2023 at 2:40 AM, hobbit said:

Skeletons in closet... FIH mgmt has been pitching IIFL securities as incredibly undervalued in the annual letters but market knows better

 

https://www.moneycontrol.com/news/business/markets/sebi-stops-iifl-from-onboarding-new-clients-for-two-years-10821761.html

 

Update on this via the Economic Times:

 

SAT stays Sebi order against IIFL Securities till further notice; stock surges 6%

https://economictimes.indiatimes.com/markets/stocks/news/sat-stays-sebi-order-against-iifl-securities-till-further-notice-stock-surges-6/articleshow/101300444.cms 

 

MUMBAI - In an interim relief to IIFL Securities, the Securities Appellate Tribunal (SAT) on Tuesday stayed the order passed by the Securities and Exchange Board of India (Sebi) against the brokerage, barring it from onboarding any new clients for two years. 

The stay order bolstered the shares, which surged more than 6% to the day’s high of Rs 65.90.

 

 

 

[ICUMD]

19 hours ago, rohitc99 said:

Outside of the BIAL, the other companies such as IIFL and other financials (~ 30% of the book value) are doing quite well. Some of them are growing 25% for now. When the biggies like ICICI bank can grow assets for now at 20%, the smaller companies in the financials space can do better

 

So a 15% annual growth in book value is not a very high bar

Shhh.

 

Secret is getting out!  Heading to high 13s now.

 

Seriously though, i think that few economies will be growing as fast as India.  BIAL Airport is situated ideally to capitalize on this growth.  

 

Projections are already for 40 million passengers in the coming year. A tremendous monetization potential.  The COVID turbulence is behind us, definitely looking forward!

[Luca]

 

How do they calculate this 7.4% fee going to Watsa? Seems way too much considering 1.5% fees on equity and 20% performance?

[SafetyinNumbers]

3 hours ago, Luca said:

 

How do they calculate this 7.4% fee going to Watsa? Seems way too much considering 1.5% fees on equity and 20% performance?

Where is this from?

 

At 20% returns and 1.5% management fees, I calculate 4.2% in fees if FIH is trading at book value. If FIH traded at a 25% premium to book, it would net reduce the dilution so the effective fee would be closer to 3.7%. Right now we have the opposite, as we are trading at a discount, the performance fee becomes more expensive the bigger the discount. The accrued performance fee isn’t very big (given the 5% hurdle is actually pretty high) right now but that might change by year end when it’s due.

 

I think whatever institution (my guess OMERS and Fidelity) negotiated this with Fairfax were thinking like long term rational shareholders with unlimited capital. This feature is there to incentivize closing the discount if it’s ever material and in fact to have the shares trade at a premium to NAV which would let FIH raise capital and grow faster at a low cost of capital. Unfortunately, those people have probably retired and the people left have turned over the funds to ESG Quant junkies. 
 

It probably wouldn’t take much buying to close the discount, share buybacks cleared up a lot of supply. If I ran the position for OMERS, I would have a plan to close the discount by year end. It would increase my position at an attractive price and my mark at an even better price. It would also be timely ahead of the Anchorage IPO when speculators might show up and reduce the cost of dilution from the management fee. Strong price movement would probably also attract momentum investors and the potential to once again trade at a premium to book.

 

 

[Luca]

11 hours ago, SafetyinNumbers said:

Where is this from?

 

At 20% returns and 1.5% management fees, I calculate 4.2% in fees if FIH is trading at book value. If FIH traded at a 25% premium to book, it would net reduce the dilution so the effective fee would be closer to 3.7%. Right now we have the opposite, as we are trading at a discount, the performance fee becomes more expensive the bigger the discount. The accrued performance fee isn’t very big (given the 5% hurdle is actually pretty high) right now but that might change by year end when it’s due.

 

I think whatever institution (my guess OMERS and Fidelity) negotiated this with Fairfax were thinking like long term rational shareholders with unlimited capital. This feature is there to incentivize closing the discount if it’s ever material and in fact to have the shares trade at a premium to NAV which would let FIH raise capital and grow faster at a low cost of capital. Unfortunately, those people have probably retired and the people left have turned over the funds to ESG Quant junkies. 
 

It probably wouldn’t take much buying to close the discount, share buybacks cleared up a lot of supply. If I ran the position for OMERS, I would have a plan to close the discount by year end. It would increase my position at an attractive price and my mark at an even better price. It would also be timely ahead of the Anchorage IPO when speculators might show up and reduce the cost of dilution from the management fee. Strong price movement would probably also attract momentum investors and the potential to once again trade at a premium to book.

 

 

Could you share how you calculate the 4.2%. I agree that from 20% CAGR to 12.6% seems very wrong. Writeup is from VIC, the 2017 one i believe.

[SafetyinNumbers]

8 hours ago, Luca said:

Could you share how you calculate the 4.2%. I agree that from 20% CAGR to 12.6% seems very wrong. Writeup is from VIC, the 2017 one i believe.

I just took performance 20% - management fees 1.5% = net 18.5% - hurdle rate 5% = 13.5% * performance fee 20% = 2.7%

So total fees are management fee 1.5% + performance fee 2.7% = 4.2%.

 

That's how I understand the performance fee works for illustrative purposes off of memory so please let me know if anyone disagrees. The calculation would have to be adjusted for three years but I think it makes sense if thinking about it on an annual basis.

[Luca]

Have to edit

Edited July 4, 2023 by Luca

[Luca]

The 1.5% fee on deployed capital is annoying to calculate precisely but i guess one can say it eats away 1.5% a year. Then the 20% performance fee eating away 2% of the returns on top. 15% Book value CAGR leading us to something around 11.5% returns?

 

Thats how i understood it more or less.

Edited July 4, 2023 by Luca

[SafetyinNumbers]

16 hours ago, Luca said:

The 1.5% fee on deployed capital is annoying to calculate precisely but i guess one can say it eats away 1.5% a year. Then the 20% performance fee eating away 2% of the returns on top. 15% Book value CAGR leading us to something around 11.5% returns?

 

Thats how i understood it more or less.

Probably a bit closer to 12% but close enough. 
 

As someone else pointed out, the performance fees are already accrued up to the current book value so net fees for someone buying now are a lot lower.