Fairfax stock positions

[bearprowler6]

Information on 13F filings can be found below:

 

https://www.sec.gov/divisions/investment/13ffaq.htm

 

From Questions 7:

 

"The Official List of Section 13(f) Securities primarily includes U.S. exchange-traded stocks (e.g., NYSE, AMEX, NASDAQ), shares of closed-end investment companies, and shares of exchange-traded funds (ETFs). Certain convertible debt securities, equity options, and warrants are on the Official List and may be reported. But see Section 13(f)(4) (referring to equity securities of a class referred to in Exchange Act section 13(d)(1)) and exemptive rules 12a-4 and 12a-9 under the Exchange Act."

 

Non US securities are excluded from the 13F filing so  for an international entity/manager such as Fairfax it is essentially useless as a source of information on their overall holdings.

[Xerxes]

^They have a small arbitrage position in Tiffany & Co.

These arbitrage operations (small versus the size of their portfolios) have appeared for a very long time.

i wonder who is in charge of these investments and what kind of return they've achieved over the long term.

 

 

I also recall Red Hat and IBM merge arb from way back when.

They got to do more of those, lever to the hilt, but not screw up as bad as Long Term Capital

[petec]

Information on 13F filings can be found below:

 

https://www.sec.gov/divisions/investment/13ffaq.htm

 

From Questions 7:

 

"The Official List of Section 13(f) Securities primarily includes U.S. exchange-traded stocks (e.g., NYSE, AMEX, NASDAQ), shares of closed-end investment companies, and shares of exchange-traded funds (ETFs). Certain convertible debt securities, equity options, and warrants are on the Official List and may be reported. But see Section 13(f)(4) (referring to equity securities of a class referred to in Exchange Act section 13(d)(1)) and exemptive rules 12a-4 and 12a-9 under the Exchange Act."

 

Non US securities are excluded from the 13F filing so  for an international entity/manager such as Fairfax it is essentially useless as a source of information on their overall holdings.

 

Thanks!

[TwoCitiesCapital]

Also - there are some known holdings missing, like Stelco, Eurobank. I don't spend a lot of time with 13F's. Does this include all the subsidiary holdings? Because if not it's basically useless.

 

I don't think you have to disclose foreign positions on a 13F.

[Xerxes]

you guys are absolutely right.

 

I recall at one point Buffet saying that he is not disclosing his foreign holding because he doesn't have to and that those names are Berkshire's internal information not available for public disclosure. i am paraphrasing.

 

and that if SEC didn't require him to disclose U.S. holdings, he wouldn't.

[petec]

Some comments from the Eurobank Q1 call:

1) Core PPI won't be affected much, with cost cuts nearly offsetting revenue declines (vs prior guidance).

2) Provisions likely to go from 90bps to 160bps which is manageable (but it is early days).

3) only c.20% of mortgage and corporate clients have taken the offered payment moratoria, and 50% of small businesses. This is lower than they expected, possibly because "these people have been tested under very severe conditions over the last four, five, six years. They remain performing. They have a payment culture that is quite strong."

4) the Cairo NPL reduction transaction has passed all hurdles. The sale of the FPS closes in the next few days and the spinout of the SPV shares will happen in August or Sept. Losses related to this deal will be booked in 2q but it sets them on a much better footing.

[jondoug]

Another attempt at buying all of Blackberry

 

https://www.thestreet.com/investing/stocks/blackberry-rises-on-fairfax-talks-to-acquire-remaining-shares

[TwoCitiesCapital]

Another attempt at buying all of Blackberry

 

https://www.thestreet.com/investing/stocks/blackberry-rises-on-fairfax-talks-to-acquire-remaining-shares

 

Was refuted by Fairfax this AM. Who knows what is going on here....

[StubbleJumper]

Another attempt at buying all of Blackberry

 

https://www.thestreet.com/investing/stocks/blackberry-rises-on-fairfax-talks-to-acquire-remaining-shares

 

Was refuted by Fairfax this AM. Who knows what is going on here....

 

 

If I had to guess, this is likely being driven by BB's convertible debs that FFH holds.  Working from memory, ~$600m of those debs come due in November-ish, so having a conversation about them 5 or 6 months in advance would be a natural thing to do.  Given the current situation with BB, if FFH were to roll the debs, it is likely that FFH would demand some sort of improvement in the coupon rate, the conversion privilege, or both.  If their demands about the conversion privilege were too outrageous, it wouldn't surprise me at all if BB didn't suggest that FFH take look at a complete acquisition.

 

Or maybe the converts have nothing to do with this, and BB will simply write a large cheque to FFH later this fall...

 

 

SJ

[petec]

Prem made a comment, either on the q1 call or the AGM call, which made me think he expected to get the money back. Personally I’d have no issue with rolling at a very good strike, but not otherwise.

[StubbleJumper]

Prem made a comment, either on the q1 call or the AGM call, which made me think he expected to get the money back. Personally I’d have no issue with rolling at a very good strike, but not otherwise.

 

 

Just for reference, the last financial report put BB's cash and short-term investments at about ~$900m and the debentures are ~$600m, so that could leave things a bit tight for BB.  I am guessing that they would want to refinance the debentures in some fashion, but I'm not convinced that there would be many takers other than FFH.

 

 

SJ

[Xerxes]

But why BB would not want to get rid of the expensive converts.

Would it not be beneficial for BB to have on the right hand side of B/S, newly issued corporate debt at lower rate than the expensive convert.

[StubbleJumper]

But why BB would not want to get rid of the expensive converts.

Would it not be beneficial for BB to have on the right hand side of B/S, newly issued corporate debt at lower rate than the expensive convert.

 

 

Expensive converts?  The current coupon is 3.75% and the conversion price is $10/sh.  That's not what I would describe as expensive for a company that is barely generating any positive cash from operations.

 

Let's invert this: if FFH were to roll the debentures in November, what would be the terms that should be demanded, understanding that there is a considerable probability that BB could continue to burn through cash and might not have $600m in cash to repay a rolled deb by the time November 2023 hits (ie, return of capital is a risk on a going-forward basis).  So what would be fair?  For a 3-year extension, would 4.25% coupon and a $5/sh conversion be fair?  For a 5-year extension, maybe 4.25% and a $4/sh conversion?  Seriously, this is a company with $900m cash, they owe $600m on the debs, their cash from ops minus capex was negative last year and barely positive the prior year, and they operate in a fickle industry (software).  Your capital is at considerable risk, so what do you demand for a return and for an upside?

 

 

SJ

[Xerxes]

I figured since a cruise line can get debt at +6%, a company like BB that is not impaired can do better that.

Even debt raised in the market for the same rate as the FFH convert (3.75%), but without the call option embedded within, is worth more than the FFH convert.

[StubbleJumper]

I figured since a cruise line can get debt at +6%, a company like BB that is not impaired can do better that.

Even debt raised in the market for the same rate as the FFH convert (3.75%), but without the call option embedded within, is worth more than the FFH convert.

 

 

The cruise lines are an interesting counter-example.  Both RCL and CCL have issued senior secured notes with double-digit coupons over the past few months.  That's junk territory, and for good reason -- we have no idea how much cash they will burn before they come through to the other side of this pandemic.  The senior secured debt holders might ultimately be end up having to petition them into bankruptcy if this drags out for years and years (which it might), but at least they have some prospect of recovering a healthy portion of their capital through a bankruptcy process because presumably they are secured against cruise ships that originally cost $1B could be sold for $200m in a liquidation process.  The convertible debt issuance to which you made reference have a coupon of 5.75% and appear to be senior unsecured, with a $10/sh conversion -- on the day that those converts closed, the closing CCL share price was $12/sh, so they were in-the-money right from the start.

 

So what about BB?  Well, we are hoping that BB will turn the corner and rack up some meaningful cash from operations, but so far it's been unconvincing. BB currently has about $300m of its own cash and about $600m of cash from its deb holders.  At the end of a 3 year or 5 year renewal term for the debs, it is not at all clear that they will have $600m to make a repayment.  As long as they don't burn down their cash balance too deeply, it would likely be possible to petition them into bankruptcy, have a firesale for their intangible assets (what would be the proceeds from a fire sale of intangible assets that are booked at $2B?  Would you get $200m?), and FFH could get its capital back.  But, if BB makes even a modest $400m acquisition in the next couple of years, all bets are off about getting all of your money back.

 

So, how do you price their debt?  I really don't know.  FFH's last debt offering was 10 year notes at 4.625%.  All things being equal, would you prefer to lend money to FFH or to BB?  Without a conversion privilege, what would you ask of BB if FFH is paying 4 5/8%?  Would 7% be good enough?  Maybe even higher (RCL and CCL were double-digit for senior secured)?  It would need to be a hell of a lot higher than 3.75% if there is no conversion privilege.  So, you can drop the coupon a bit if you include a conversion privilege, but what should be your conversion price?  Well, $5/sh is a premium to the average share price over the past month, but it's a slight discount to the price of the past few days, so it's probably a valuable OTM option at that price.  At a conversion price of $4/sh, it's a very valuable ITM option.  So what combination of coupon, conversion privileges and duration would make sense today?  I will confess that I don't really know -- all I do know is that there needs to be a considerable improvement in the debenture terms over the current 3.75% and $10/sh conversion.

 

 

SJ

[Xerxes]

If BB is not going anywhere, then John Chen got good terms for the covert.

He sold the call option to FFH, that isn't worth much.

 

From 2013 shareholder return below. What I underlined still have some value and is applicable today. The rest of paragraph changed so much that what you read below cannot be reconcile to the blackberry story today. I am still positive that BB has merits post-phone era, and you are paying only 3 times sales for it.

 

 

Markets fluctuate – and very often in extreme directions. Remember the tech boom, when companies with no sales were valued at tens of billions of dollars? In 2000, Northern Telecom accounted for 36.5% of the Toronto Stock Exchange index and was worth almost Cdn$400 billion; by 2009, it was bankrupt! Well, last year the opposite happened to Research in Motion (now known as BlackBerry). At its low of approximately $61⁄2 per share, it sold at 1⁄3 of book value per share and a little above cash per share (it has no debt). The stock price had declined 95% from its high! The company produces the BlackBerry which for years was synonymous with the smart phone. The BlackBerry brand name is perhaps one of the more recognizable brand names in the world and the company has 79 million subscribers worldwide. Revenues went from essentially zero to $20 billion in about 15 years – and then it hit an air pocket! The company got complacent, perhaps overconfident, and did not respond quickly enough to Apple and Android. Mike Lazaridis, the founder and a technological genius – and a good friend – asked me to join the Board, which I did after meeting Thorsten Heins, whom Mike recommended as the next CEO of the firm. Thorsten’s 27 years of experience in all types of leadership jobs in small and large divisions at Siemens, combined with his five years at BlackBerry, were exactly what was needed. Thorsten hired a very capable management team and then focused on producing a high quality BB10 – the next generation of BlackBerries. The brand name, a security system second to none, a distribution network across 650 telecom carriers worldwide, a 79 million subscriber base, enterprise customers accounting for 90% of the Fortune 500, almost exclusive usage by governments in Canada, the U.S. and the U.K., a huge original patent portfolio, an outstanding new operating system developed by QNX and $2.9 billion in cash with no debt, are all formidable strengths as BlackBerry makes its comeback! The stock price recently moved as high as $18 per share, a far cry from the $140 per share it sold at a few years ago. And please note, 1.8 billion cell phones are sold worldwide annually, and of the 6 billion cell phones in the world, only 1 billion are smart phones. Lots of opportunity for Canada’s greatest technology company! What is striking, even for a person like me who has seen many bull and bear markets, is that at $61⁄2 per share, all the Wall Street and Bay Street analysts were uniformly negative – just as they were uniformly positive only a few years ago at prices north of $100 per share. John Templeton’s advice to us: “Buy at the point of maximum pessimism”, still rings in our ears!! We own approximately 10% of the company at an average cost of $17 per share and we are excited about its prospects under Thorsten’s leadership and Mike’s technical genius. 

 

 

[StubbleJumper]

If BB is not going anywhere, then John Chen got good terms for the covert.

He sold the call option to FFH, that isn't worth much.

 

 

I don't think that's quite the right way to evaluate it.  John Chen paid an appropriate interest rate and granted an appropriate call option at the time the notes were last negotiated. 

 

The interest rate of 3.75% strikes me as bat-shit crazy for renewal in November 2020, but it wasn't all that bat-shit crazy when the notes were negotiated.  At that time, BB already had a large pile of cash, and FFH's money simply served to make that pile even larger.  In fact, BB at the time was doing something similar to what FFH is doing today -- that is, BB borrowed FFH's money to effectively hold marketable investments (I don't know what BB's net cost was, but I don't think it was very high).  FFH is doing the very same thing today in that it is holding commercial paper in the holdco using bank-money from the revolver (FFH claims to have a favourable spread).  From a creditor's perspective, the problem with BB is that they burned an enormous portion of their cash on the Cylance acquisition last winter, which qualitatively changed the risk of the debentures.  That shift in risk is not such a problem for 2020 as they still have adequate cash to repay the debs, but it does demand more favourable terms for a potential extension to 2023 or 2025.

 

Similarly, the fact that the call option embedded in the converts looks as if it will be worthless upon expiration in November, does not mean that it was worthless when it was sold.  In Sept 2016, when the debs were negotiated, BB traded between US$7-8/share and the conversion privilege was priced at US$10/sh for a 4 year term.  That was a valuable option at the time.  Clearly, if the same option were offered in November 2020, it would be almost worthless because the underlying share price is so much lower.  But, a conversion price of $5/sh (or even $6) would be a valuable option.

 

 

SJ

[Xerxes]

100% agreed.

 

I should have added to my comment, "in hindsight"

J Chen naturally was and I am guessing continuing to be upbeat (eventhough it is uphill).

Not an easy job and the reputational opportunity cost is enormous.

 

It takes a rare talent to be able to land a crashing business without totally crashing it. When he took over, revenues (dominated by h/w) were coming off the cliff, and whatever s/w seeds he planted were nothing compared to hardware sales that continue to command such large portion of its topline. It was a multi-year crash in slow motion and I don't think many people understood and appreciate what a difficult job that probably was. Today, those h/w sales are zero. It has landed without crashing, now it needs jet fuel to propel its s/w engines that keep the ship afloat and re-growing the topline, now dominated by s/w. Whether this new phase is successful or not remains to be seen. I cannot see how this new environment will not be a tailwind for his cybersecurity business. Even its QNX business that has some exposure to the car industry is bound to bounce back with a resurgence to individual ownership.

 

He has the tailwinds now, and no longer has the headwinds of declining h/w sales overshadowing its nascent s/w business. it is time to capitalize.

On Cyient, I have no clue. I am not in the cyber security business so cannot comment if it was a good purchase or not. And I think whatever various generalist investors know about Cyient is based on business articles that they read which either tends to say bad things when things go bad in the short term or say good things when things go good in the short term.

 

It is like listening to CNBC or Bloomberg, when the market is crashing, they build narrative around the crash and when the market is shooting up they build a narrative around the rising market.

[Parsad]

First Kennedy Wilson/Fairfax investment under $2B loan portfolio:

 

https://finance.yahoo.com/news/kennedy-wilson-fairfax-complete-first-100000592.html

 

Cheers!

[TwoCitiesCapital]

Fairfax has agreed to roll it's Blackberry converts.

 

Current debentures @ 3.75% and $10 strike are being redeemed @ 101.6854.

 

Principal is being reduced slightly and rolled between Fairfax and one other institutional investor for new converts @ 1.75% coupon and a $6 strike for conversion.

[StevieV]

Basically a speculative investment.  $6 conversion in Nov. 2023 may turn out great.  Not that much above the current $4.80 and 3 years is a reasonable time.  Of course, may not work out at all.

 

 

[StubbleJumper]

Fairfax has agreed to roll it's Blackberry converts.

 

Current debentures @ 3.75% and $10 strike are being redeemed @ 101.6854.

 

Principal is being reduced slightly and rolled between Fairfax and one other institutional investor for new converts @ 1.75% coupon and a $6 strike for conversion.

 

 

Well, FFH received a valuable OTM option with the roll, but we'll see a reduction of US$10m per year of interest income.  If BB actually does turn the corner, that option could become quite valuable.  The fact that BB needed to have the coupon reduced is a bit of a concern, because it really does call into question their ability to write a US$535m cheque in November 2023.  I can't say that I am particularly surprised by this outcome, but I had hoped for somewhat more favourable terms.

 

 

SJ

[petec]

Fairfax has agreed to roll it's Blackberry converts.

 

Current debentures @ 3.75% and $10 strike are being redeemed @ 101.6854.

 

Principal is being reduced slightly and rolled between Fairfax and one other institutional investor for new converts @ 1.75% coupon and a $6 strike for conversion.

 

 

Well, FFH received a valuable OTM option with the roll, but we'll see a reduction of US$10m per year of interest income.  If BB actually does turn the corner, that option could become quite valuable.  The fact that BB needed to have the coupon reduced is a bit of a concern, because it really does call into question their ability to write a US$535m cheque in November 2023.  I can't say that I am particularly surprised by this outcome, but I had hoped for somewhat more favourable terms.

 

 

SJ

 

So did I, but doesn’t the change in rate just reflect the change in bond yields?

[StubbleJumper]

Fairfax has agreed to roll it's Blackberry converts.

 

Current debentures @ 3.75% and $10 strike are being redeemed @ 101.6854.

 

Principal is being reduced slightly and rolled between Fairfax and one other institutional investor for new converts @ 1.75% coupon and a $6 strike for conversion.

 

 

Well, FFH received a valuable OTM option with the roll, but we'll see a reduction of US$10m per year of interest income.  If BB actually does turn the corner, that option could become quite valuable.  The fact that BB needed to have the coupon reduced is a bit of a concern, because it really does call into question their ability to write a US$535m cheque in November 2023.  I can't say that I am particularly surprised by this outcome, but I had hoped for somewhat more favourable terms.

 

 

SJ

 

So did I, but doesn’t the change in rate just reflect the change in bond yields?

 

 

Hi Pete,

 

Good to see you back in the forums, as I hadn't read even a peep from you for the past few weeks, and I was hoping that you were on vacation and not infected with covid!

 

I would argue that there is a couple of things that have occurred since the last time the debs were negotiated at 3.75%.  First, as you've noted, interest rates have broadly declined -- the risk-free rate for a US-dollar 3-year term has probably dropped about ~150 bps since the last time the debs were negotiated in Sept 2016.  But, in addition, I would argue that BB's company-specific risk has changed significantly, and a considerable risk premium needs to be demanded to recognize that there is clear potential that FFH will not get return of capital in November 2023.

 

Take a look at BB's financials the last time that the debs were negotiated back in 2016.  When BB published its financials in Feb 2017, it reported cash, short-term and long-term investments of $734, $644, $269m respectively, for a total cash/investment balance of $1,637m.  Effectively, BB did not really need the $605m proceeds from the debentures because it already had $1 billion of its own cash laying around.  If you look at previous years, you'll see that the healthy cash position was even healthier (ie, it was $2.5B in Feb 2016).  Despite the industry risks that BB faced, that large cash buffer considerably reduced the risk of FFH being unable to recuperate its capital -- or at least it did up until BB dropped $1B on Cylance.  Despite that cash buffer, BB had to pay 3.75% plus offer a US$10/sh conversion privilege because lending money to tech companies can be pretty risky.

 

Fast-forward to today.  It looks like ~$500m of the debentures are getting rolled, and the other ~$100m will be repaid.  So, where does BB stand?  As of May 31, BB had cash, short-term and long-term investments of $907m.  My understanding is that ~$100m of that is ear-marked to repay part of the debs, leaving a pro-forma cash balance of $807m, of which $300m is BB's cash and $500 is FFH's cash.  My arithmetic says that for the year ended Feb 2020, BB had cash from ops of $26m and it looks like they had capex of $44m (presumably this was maintenance capex because it was so small), resulting in a small cash burn.  The problem with rolling the debs is that, if BB burns cash for another three years, will it be in a position to write a $500m cheque in Nov 2023?  If everything goes well, the answer is yes.  But, a modest increase in the cash-burn or one small, dumb acquisition could leave BB short of cash in 2023.  In short, BB's qualitative risk has increased considerably over the past year, and IMO that requires a considerably larger risk premium.

 

Interestingly, despite the repricing of the conversion privilege, I am not convinced that the OTM option is more valuable today than it was in Sept 2016.  Back in Sept 2016, FFH negotiated a conversion price of US$10/sh and the prevailing stock price was US$8/sh, which would have ended in the money if the stock had climbed ~25% over the four-year term of the debs.  The roll of the debs is repricing the conversion to US$6/sh with a prevailing share price of ~US$4.80, which once again will require the shares to climb ~25% for the conversion to end in the money, but this time the term is only 3 years and 4 months (ie, July 2020 to Nov 2023).  Ignoring the possibility that the stock is undervalued or has higher volatility in 2020 (sigma), an argument could be made that the new conversion privilege is less valuable now than it was in Sept 2016.

 

Anyway, as I suggested, I'm not particularly surprised by this outcome, but I had hoped for slightly more favourable terms.

 

 

SJ

[Xerxes]

It could also be said FFH has effectively re-priced the cost basis of its all-in stake (Deb and commons) on BB. Thereby tilting the position into a more all-or-nothing and with the lower blended cost basis on both debs and commons it would be much easier for it to give up its stake in potential acquisition by a third party.