Fairfax stock positions

[dartmonkey]

20 hours ago, SafetyinNumbers said:

Fairfax showing some good timing. They participated in a financing in December 2022 for €50M and are up over 100% since including the warrants. 

So Fairfax controls 9.188m shares, 6.688m through shares and 2.5m through call options exercisable for another year and a half. They owned no shares in 2020 (at least, no mention of them in the annual report), and 3.7m shares according to the 2021 AR and then 4m according to the 2022 AR. I can't tell what price they bought them at, but the average price was about 13.5€ in 2021 and 15€ in 2022. Interestingly, they did own 7m shares in 2014 (5.9% of the company, a higher percentage of shares then that what they own now), but reduced that in 2017, and no mention of them from 2018 to 2021, so I guess they were probably sold. And that, despite what seemed like a long-term commitment iin 2013: "We welcome Fairfax to MYTILINEOS Group and we express our profound satisfaction for our future joint-course with a prominent long-term investor, headed by Prem Watsa, a global and most respected business leader, which is now the 3rd largest shareholder of MYTILINEOS Group. This development is evidence of Fairfax’s confidence in the MYTILINEOS Group’s potential and value, as well as in the capabilities and prospects of the Greek economy. "

 

Anyway, if we guestimate that they bought the first 3.7m shares at 13.5€, 0.3m more at 15€, and knowing they bought the second block of 2.7m shares at 18.50€, and will buy a third block of 2m shares at 20€, that gives them a cost basis of 154m€and a current price of 256m€, for a nice 73% gain in about 2 years.

 

But maybe they own this from much earlier? I don't know what happened between 2017 and 2021: perhaps they still owned shares but the position was too insignificant to report? Shares were sub-10 for most of this time. On the other hand, they reported a cost basis of 35.5m EU in 2016, which dropped to 15.7m in 2017, suggesting they had sold more than half, and then, no mention in annual reports until 2021, when it reappears with 3.7m shares. Anyone know what happened in the interim?

 

 

[SafetyinNumbers]

4 hours ago, dartmonkey said:

So Fairfax controls 9.188m shares, 6.688m through shares and 2.5m through call options exercisable for another year and a half. They owned no shares in 2020 (at least, no mention of them in the annual report), and 3.7m shares according to the 2021 AR and then 4m according to the 2022 AR. I can't tell what price they bought them at, but the average price was about 13.5€ in 2021 and 15€ in 2022. Interestingly, they did own 7m shares in 2014 (5.9% of the company, a higher percentage of shares then that what they own now), but reduced that in 2017, and no mention of them from 2018 to 2021, so I guess they were probably sold. And that, despite what seemed like a long-term commitment iin 2013: "We welcome Fairfax to MYTILINEOS Group and we express our profound satisfaction for our future joint-course with a prominent long-term investor, headed by Prem Watsa, a global and most respected business leader, which is now the 3rd largest shareholder of MYTILINEOS Group. This development is evidence of Fairfax’s confidence in the MYTILINEOS Group’s potential and value, as well as in the capabilities and prospects of the Greek economy. "

 

Anyway, if we guestimate that they bought the first 3.7m shares at 13.5€, 0.3m more at 15€, and knowing they bought the second block of 2.7m shares at 18.50€, and will buy a third block of 2m shares at 20€, that gives them a cost basis of 154m€and a current price of 256m€, for a nice 73% gain in about 2 years.

 

But maybe they own this from much earlier? I don't know what happened between 2017 and 2021: perhaps they still owned shares but the position was too insignificant to report? Shares were sub-10 for most of this time. On the other hand, they reported a cost basis of 35.5m EU in 2016, which dropped to 15.7m in 2017, suggesting they had sold more than half, and then, no mention in annual reports until 2021, when it reappears with 3.7m shares. Anyone know what happened in the interim?

 

 

I read the press release differently. I agree they owned ~4m shares coming into the transaction. They added 2.7m shares at €18.5 and the 2.5m €20 strike warrants. They must have originally owned ~700k shares before acquiring ~4.9m shares in 2013 at ~€5.13 based on the MYTILINEOS 2013 AR (reference attached). They also must have sold 1.6m shares at some point before this most recent transaction to get to 4m shares. I doubt the cut it all the way to zero but I’m not sure. But ultimately ~6x on the original shares in ~10 years. In the words of Larry David, pretty, pretty, pretty good.

 

Edited June 2, 2023 by SafetyinNumbers

[dartmonkey]

From the Dec 2022 PR, we know the Fairfax stake went from 3.985m to 6.688m (by virtue of buying 50m EU worth, at 18.50EU/share), and that they can buy another 50m EU worth at 20/sh. And that at some point in 2014, they had 7m shares. In Fairfax's 2016 AR, they had shres with a cost basis of 35.5m EU, which sounds like those 7m shares bought at around 5EU,  ut then a year later, they had shares with a cost basis of 15.9m EU, so I guess they had sold a bit more than half. No mention of these shares in Fairfax's ARs for 2018-2019-2020, but then they had 3.7m shares in the 2021, and 4m by the end of 2022.

 

So did they have those 3.7m all along, and just stop reporting them for a few years for some reason? And then bought 0.3m more in 2022, to get up to 4m, before buying their latest stake in December? I guess that's the simplest explanation. That would mean that there were 3.7m shares with a cost basis of 5.13 EU (announced in Mytilineos's 2013 AR you cited), and another 0.3m bought last year, so at about 15 EU/sh.

 

That would mean that their cost basis was lower, only 123m EU, no 154m, so at the current value of 267m, they are sitting on a gain of 114%. But it is better to think of an investment in 2 phases: one of 4m shares owned for 10 years, up from 5 to 29EU (along with some profit taking from 3m shares sold in 2017, for an unknown amount), and the other one of 5.2m shares, up 50% in 6 months. Both (or probably, all 3) are more than satisfactory, to say the least. 

[MMM20]

This feels like a Saturday morning post so here goes.

 

https://www.rottentomatoes.com/m/blackberry

 

This movie is a must watch for Fairfax / Blackberry shareholders. So good... 98% on Rotten Tomatoes.

 

Helps if you’re a fan like I am of Glenn Howerton and Jay Baruchel. 

 

 

[50centdollars]

2 hours ago, MMM20 said:

This feels like a Saturday morning post so here goes.

 

https://www.rottentomatoes.com/m/blackberry

 

This movie is a must watch for Fairfax / Blackberry shareholders. So good... 98% on Rotten Tomatoes.

 

Helps if you’re a fan like I am of Glenn Howerton and Jay Baruchel. 

 

 

It was a great movie. They clearly lost their vision/leadership and had no answer to the iPhone. Jim Balsillie running around trying to buy a hockey team was pretty stupid. 

[Parsad]

On 6/3/2023 at 7:42 AM, 50centdollars said:

It was a great movie. They clearly lost their vision/leadership and had no answer to the iPhone. Jim Balsillie running around trying to buy a hockey team was pretty stupid. 

 

I don't really care one way or the other, as I'm sure it will be an entertaining movie.  But they did take a ton of artistic license with the company based on what many people have said that were there during that era.  Cheers!

[nwoodman]

Kennedy Wilson 8K Filing
 

The Company has entered into an agreement with Fairfax Financial Holdings Limited, a Canadian corporation, (collectively, with certain of its subsidiaries and affiliates, “Fairfax,” and together with KW, the “KW/FF Purchasers”) to together purchase 63 of the Initial Loans.
 

The purchase price for such 63 Initial Loans and the Additional Loans (as described below) (collectively, the "KW/FF Loans") is a total of approximately $2.1 billion, subject to customary prorations and adjustments, and (i) will be paid to PacWest to acquire a total of approximately $2.3 billion in aggregate principal balance that is currently outstanding under the KW/FF Loans; and (ii) is the price for the entire portfolio of KW/FF Loans and may not necessarily be reflective of the price paid for any individual loan. 

 

The aggregate principal balance of the KW/FF Loans, which are floating rate, currently carries an average interest rate of approximately 8.6% and more than 70% of the KW/FF Loans are secured by multifamily or student housing development projects with the balance being a mix of industrial, hotel and life science office property development projects.

https://otp.investis.com/clients/us/kennedy_wilson1/SEC/sec-show.aspx?Type=html&FilingId=16708374&CIK=0001408100&Index=10000

Edited June 5, 2023 by nwoodman

[gfp]

On 5/22/2023 at 6:12 AM, gfp said:

KW / PACW transaction.  Fairfax likely benefits

https://www.cnbc.com/2023/05/22/pacwest-bancorp-to-sell-real-estate-loans-to-kennedy-wilson-subsidiary.html

 

https://www.sec.gov/ix?doc=/Archives/edgar/data/0001102112/000110465923062856/tm2316420d1_8k.htm

 

 

Here is the Fairfax press release on the deal.  Love it.

https://s1.q4cdn.com/579586326/files/doc_news/2023/PRFFH-June-5-2023-KW-June-2023-Transactions.pdf

 

 

"

Taking into account the discount at which Fairfax acquired the principal balances of the Loans, Fairfax expects the average annual return on the capital deployed by Fairfax in connection with the Loans to exceed 10%. All of the Loans are secured by real property located in the United States with an average loan-to-value ratio of approximately 51% and are supported by completion guarantees issued by the project equity sponsors. More than 70% of the Loans relate to multifamily or student housing development projects with the balance being a mix of industrial, hotel and life science office property development projects."

 

and

 

"

In addition to the Transaction, Fairfax also agreed to make a $200 million preferred equity investment in Kennedy Wilson. Under the terms of the agreement relating to the investment, Fairfax will acquire perpetual preferred stock that carries a 6.0% annual dividend rate and is callable by Kennedy Wilson at any time. Additionally, Fairfax acquired 7-year warrants for approximately 12.3 million common shares with an initial strike price of $16.21 per share, based on Kennedy Wilson’s closing price on June 2, 2023."

Edited June 5, 2023 by gfp

[nwoodman]

“In addition to the Transaction, Fairfax also agreed to make a $200 million preferred equity investment in Kennedy Wilson. Under the terms of the agreement relating to the investment, Fairfax will acquire perpetual preferred stock that carries a 6.0% annual dividend rate and is callable by Kennedy Wilson at any time. Additionally, Fairfax acquired 7-year warrants for approximately 12.3 million common shares with an initial strike price of $16.21 per share, based on Kennedy Wilson’s closing price on June 2, 2023. The investment is subject to customary closing conditions and is expected to close during the second quarter of 2023.”

 

Rather Buffett like.  Shares out on KW currently stand at 137.2m, so they stand to pick up 12.3/(137.2+12.3)=8% at what could prove to be a very respectable strike price in a few years along with getting paid to wait with the prefs.  They own around 9% now. 
 

The press release is now on their website 

 

https://www.fairfax.ca/news/press-releases/press-release-details/2023/Fairfax-Financial-Partners-With-Kennedy-Wilson-to-Acquire-Loan-Portfolio-From-Pacific-Western-Bank-Makes-Additional-Equity-Investment-in-Kennedy-Wilson/default.aspx

[Thrifty3000]

37 minutes ago, nwoodman said:

“In addition to the Transaction, Fairfax also agreed to make a $200 million preferred equity investment in Kennedy Wilson. Under the terms of the agreement relating to the investment, Fairfax will acquire perpetual preferred stock that carries a 6.0% annual dividend rate and is callable by Kennedy Wilson at any time. Additionally, Fairfax acquired 7-year warrants for approximately 12.3 million common shares with an initial strike price of $16.21 per share, based on Kennedy Wilson’s closing price on June 2, 2023. The investment is subject to customary closing conditions and is expected to close during the second quarter of 2023.”

 

Rather Buffett like.  Shares out on KW currently stand at 137.2m, so they stand to pick up 12.3/(137.2+12.3)=8% at what could prove to be a very respectable strike price in a few years along with getting paid to wait with the prefs.  They own around 9% now. 
 

The press release is now on their website 

 

https://www.fairfax.ca/news/press-releases/press-release-details/2023/Fairfax-Financial-Partners-With-Kennedy-Wilson-to-Acquire-Loan-Portfolio-From-Pacific-Western-Bank-Makes-Additional-Equity-Investment-in-Kennedy-Wilson/default.aspx

 

Assuming they sell treasuries yielding 4% to pay for this I estimate it will add around $4 of after tax EPS for FFH shares. Not bad.

Edited June 5, 2023 by Thrifty3000

[SafetyinNumbers]

1 hour ago, nwoodman said:

“In addition to the Transaction, Fairfax also agreed to make a $200 million preferred equity investment in Kennedy Wilson. Under the terms of the agreement relating to the investment, Fairfax will acquire perpetual preferred stock that carries a 6.0% annual dividend rate and is callable by Kennedy Wilson at any time. Additionally, Fairfax acquired 7-year warrants for approximately 12.3 million common shares with an initial strike price of $16.21 per share, based on Kennedy Wilson’s closing price on June 2, 2023. The investment is subject to customary closing conditions and is expected to close during the second quarter of 2023.”

 

Rather Buffett like.  Shares out on KW currently stand at 137.2m, so they stand to pick up 12.3/(137.2+12.3)=8% at what could prove to be a very respectable strike price in a few years along with getting paid to wait with the prefs.  They own around 9% now. 
 

The press release is now on their website 

 

https://www.fairfax.ca/news/press-releases/press-release-details/2023/Fairfax-Financial-Partners-With-Kennedy-Wilson-to-Acquire-Loan-Portfolio-From-Pacific-Western-Bank-Makes-Additional-Equity-Investment-in-Kennedy-Wilson/default.aspx

The prefs and warrants almost replicated the common exactly. The same yield (6%) and the same strike for the warrants where the shares closed ($16.21). Plus the pref are cancelled when the warrants are issued. It just gives us priority in capital stack which is valuable and potentially better capital treatment which is also valuable.

[Matthew Lembo]

Another way to look at the pref equity investment is that it is covers all of the capital KW needs to invest in this deal (5% x $3bn = $150mm) plus $50mm. 
 

So fairfax is funding 100% of the purchase price and getting less than 100% of the returns. However fairfax is also getting ownership in KW which mitigates its dilution on this deal and is profitable and valuable in its own right. 
 

 

[Xerxes]

Forgive my ignorance:

 

how does one assess that FFH is indeed buying the dip on WestPac loan portfolio ?
 

My thinking would have been that the loan portfolio probably had a 6-7% rate pre-SVB distress. Now post-stress trades below face value, so north of +8% yield, therefore probably buying them on the cheap as long as the collateral is good etc. (I.e issue was with the lender and not the borrower)

 

however these are floating rate and not fixed. Therefore, PacWest should not have really been in a distressed position, as the funding cost would have been pass through. 
 

is there something that I am missing 

[TwoCitiesCapital]

48 minutes ago, Xerxes said:

Forgive my ignorance:

 

how does one assess that FFH is indeed buying the dip on WestPac loan portfolio ?
 

My thinking would have been that the loan portfolio probably had a 6-7% rate pre-SVB distress. Now post-stress trades below face value, so north of +8% yield, therefore probably buying them on the cheap as long as the collateral is good etc. (I.e issue was with the lender and not the borrower)

 

however these are floating rate and not fixed. Therefore, PacWest should not have really been in a distressed position, as the funding cost would have been pass through. 
 

is there something that I am missing 

 

I'm gonna guess PACW sold what it COULD without taking a capital hit - this the sale of floating rate notes to raise liquidity as opposed to fixed rate notes and taking a capital hit. 

[bluedevil]

Not an expert, but i would assume banks hate having to take possession to manage buildings if there are defaults, etc, and that this portfolio will have some defaults.  The edge that KW+FFH have is that KW will be able to directly manage any defauls, whereas it would create stress for PacWest.  Also gives PacWest liquidity.

 

 

 

[petec]

On 6/5/2023 at 2:59 PM, SafetyinNumbers said:

The prefs and warrants almost replicated the common exactly. The same yield (6%) and the same strike for the warrants where the shares closed ($16.21). Plus the pref are cancelled when the warrants are issued. It just gives us priority in capital stack which is valuable and potentially better capital treatment which is also valuable.

 

They've structured a number of deals this way which I think is quite smart.

 

[A_Hamilton]

On 6/5/2023 at 11:57 AM, Xerxes said:

Forgive my ignorance:

 

how does one assess that FFH is indeed buying the dip on WestPac loan portfolio ?
 

My thinking would have been that the loan portfolio probably had a 6-7% rate pre-SVB distress. Now post-stress trades below face value, so north of +8% yield, therefore probably buying them on the cheap as long as the collateral is good etc. (I.e issue was with the lender and not the borrower)

 

however these are floating rate and not fixed. Therefore, PacWest should not have really been in a distressed position, as the funding cost would have been pass through. 
 

is there something that I am missing 

The issue for Pacwest wasn't the loan quality or the yield they were earning. The problem for PACW was that they were seeing deposit outflows and were having to fund these with wholesale funding / using up their FHLB/discount window etc lines. The rationale for selling is that you get rid of the risk that you need to fully fund the incremental $1.7 billion (on top of the $2.3 billion already outstanding) of borrowings as these projects get completed. Too, in the current environment there is some extension risk if the deal sponsor can't find another bank to take a traditional 1st or, more troublesome, was developing on spec and can't service the loan. The mark here so close to par and the low LTV's on completion cost suggest that across the book as long as thereisn't fraud and disbursements to builders are properly done based on completion milestones, these should be money good. In any case, the overall reason for PACW to sell was to bring more liquidity on its balance sheet and get rid of a contingent but known call on liquidity. 

Edited June 8, 2023 by A_Hamilton
grammar fix

[Viking]

Poseidon - Atlas - Seaspan

 

Poseidon is the entity formed by Fairfax, the Washington Family, David Sokol and Ocean Network Express (ONE) that took Atlas private in March, 2023. To keep things simple, for now I am going to refer to Atlas as Atlas (and not Poseidon).   

 

Atlas is one of Fairfax’s largest equity holdings with a fair value of $2.04 billion and carrying value of $1.64 billion at March 31, 2023. At fair value, it is about 12.7% of Fairfax’s total equity portfolio of $15.7 billion. It is a significant holding.

 

Who is Atlas?

 

Atlas is a global asset management company. Their business is deploying capital to create long term value for owners. Today, Atlas owns two businesses:

• Seaspan (91% of EBITDA): the largest independent owner and operator of shipping containers in the world
• APR Energy (9% of EBITDA): the largest owner and operator of gas turbines in the world.

Atlas Feb 2023 Presentation: 

- https://filecache.investorroom.com/mr5ircnw_seaspan/1280/download/Atlas Investor Presentation February 2023 - v02.pdf

 

A Brief History: Seaspan to Atlas to Poseidon

 

1.) Seaspan (2005)

• Seaspan was founded by the Washington Family in 1999. In 2005, Seaspan Corporation was taken public and listed on the NYSE. Today, Seaspan is the largest independent owner and operator of containerships in the world with 13% market share. As of March 31, 2023, Seaspan’s operating fleet consists of more than 140 containerships with a total capacity of over 1.1M TEU. With 67 vessels under construction, the total capacity increases to over 1.95M TEU on a fully delivered basis.

2.) APR Energy

• From 2015-2017, Fairfax invested about $460 million to purchase 67.8% interest in APR. In November of 2019, Fairfax sold APR to Atlas for $254 million in Atlas shares (22.9 million x $11.10/share). Fairfax unloaded a problem child, so it was a great deal for Fairfax. Sokol got ownership of a second company - this time an energy company.
• Atlas is still in the process of turning APR around. New CEO. New strategy: exit Argentina and shift to long term contracts.

3.) Atlas Corp (Nov 2019)

• Concurrent with the APR purchase, Atlas was created. It is now ‘an asset management company’ and its focus is ‘deploying capital to create long term value for owners’. It was interesting listening to the management team try and explain what they were doing to a bunch of container shipping analysts.
• The analyst community was never able to fully grasp the vision of what Sokol and team were trying to accomplish. It was the case initially with Seaspan when they tried to make the company a less cyclical business (more akin to a leasing company). The pivot to an asset management company (with the purchase of APR) was even more baffling for analysts.

4.) Poseidon (March 2023)

• Taking Atlas private now allows Sokol and the management team the ability to take Poseidon in whatever direction they want. Trying to appease a small group of minority shareholders (and analysts) is like herding cats. Sokol is a bright guy. He is ambitious. And he has a lot to prove. This probably makes good sense for everyone. Especially given the current weakness (putting it politely)  in the container shipping market.
• The majority of the funding for the buyout of minority shareholders was provided by ONE, Seaspan's largest customer (at 24%). Fairfax did not provide any additional funds.

Who owns Atlas?

• Fairfax  (45%)
• Washington Family (22% plus $175 million more?)
• Ocean Network Express ONE (30% ish? up to $1.4 billion?)
• Management: Sokol, Chen etc (? plus $30 million extra?)

Poseidon has what looks to be a pretty rock solid ownership group: Understand the industry. Deep pocketed investors. Patient. Supportive. Long term focus. Sokol and the management team must be SO HAPPY that the take private transaction is completed.  

 

Washington Family founded Seaspan in 1999. Seaspan was listed on NYSE in 2005. They have been a large shareholder of Seaspan ever since.

• https://www.washingtoncompanies.com/about-us/#our-history

Ocean Network Express (ONE) was established in 2017 with the merger of 3 Japanese container shippers ('K' Line, MOL and NYK). With a fleet size of 1,505,181 TEU, ONE is the 7th largest container shipper in the world. It is part of ‘THE Alliance’. It is Seaspan’s largest customer (at 24%).

• https://www.one-line.com/en/standard-page/ocean-network-express

Why did Fairfax decide to invest in Seaspan/Atlas?

 

It was a bet on the jockey: David Sokol, and his impressive long term track record.

It was also an opportunity to partner with the Washington Family.

 

From Fairfax’s 2017AR, Prem’s letter:

• “Late in 2017, we had the good fortune to be a partner with David Sokol and Dennis Washington, two outstanding businessmen with great track records, by investing in Seaspan. Dennis is the largest shareholder of Seaspan while David became its Executive Chairman in July 2017. David has one of the most outstanding records I have come across, as he built Mid American Energy from revenue of $116 million in 1991 to revenue of $11 billion in 2010, while net income increased from $27 million to $1.2 billion over the same period, representing a compound growth rate of 22.4% per year.”

How much has Fairfax invested in Atlas?

 

Common shares:

• Fairfax owns 130.8 million shares of Atlas = 45.4% of shares outstanding. On Feb 1, 2023, Atlas had 287.8 million shares outstanding. Below is a summary of how Fairfax accumulated its shares, beginning in July 2018.

 

 

Other investments in Atlas:

• In June 2021, Fairfax converted $600 million in secured debt to $300 million in unsecured debt (5.5%) and $300 million in preferred shares (7%) and 1 million warrants ($13.71 strike, which have since been exercised.

 

How has the equity part of the investment performed?

 

Common shares:

• Based on the take private price of $15.50/share, Fairfax made a fair market gain of $9.225/share or $1.2 billion or +117% on its common stock investment in Atlas since 2018.

 

Fairfax also has $300 million in debt that is paying $16.5 million in interest (5.5%). And they have $300 million in preferred shares that pay $21 million in dividends (7%).

 

Future prospects for Atlas/Poseidon?

 

Recent developments:

• Seaspan is in the middle of a dramatic increase in capacity. They have 67 new container ships coming in 2023 and 2024 that will increase capacity from 1.1 to 1.95 million TEU. This will make them larger than ONE (1.5 million TEU).
• At the same time:
  • weak macroeconomic background
  • rising cost of capital - spiking interest rates
  • charter rates for container ship rates have fallen dramatically
  • the 3 ocean alliances look like they are in the process of disintegrating
• So it would be an understatement to say that there is a lot going on right now in Seaspan’s business. They have long term charters on all new ships coming on line. And they have the financing lined up for the new-builds.
• As discussed earlier, APR is still in turnaround mode.

My guess is 2023 and 2024 will be quiet years as Atlas focusses on execution at Seaspan and APR. I wonder if the headwinds (softness is the shipping container market and higher cost of capital) mutes the expected earnings growth at Atlas. Probably. Having a very strong private ownership group is a real benefit given the current environment.

 

Conclusion

Fairfax has done exceptionally well so far with its investment in Atlas. It will be interesting to see how the next two years play out. Does the new build strategy deliver the expected growth in earnings? Do they further diversify the platform and create a third earnings stream? What does Sokol and the management team accomplish over the next 5 years?

 

—————

Davis Sokol joined Seaspan in 2017. His claim to fame was as Chairman and CEO of MidAmerican Energy, a company he sold to Berkshire Hathaway in 2000. He remained at Berkshire Hathaway until 2011, when he retired.

• CNBC TRANSCRIPT:  David Sokol Defends His Controversial Lubrizol Stock Purchases
• https://www.cnbc.com/2011/04/01/cnbc-transcript-david-sokol-defends-his-controversial-lubrizol-stock-purchases.html

—————-

Harpex Index: reflects the worldwide prices on the charter market for container ships

• https://www.harperpetersen.com/harpex

—————-

What are the ocean shipping alliances?

• https://www.flexport.com/blog/ocean-alliances-everything-you-need-to-know/
• https://www.container-xchange.com/blog/shipping-alliances/

Alphaliner TOP 100 / 28 Jun 2023

• https://alphaliner.axsmarine.com/PublicTop100/

Edited June 29, 2023 by Viking

[petec]

Nice summary. I would add:

1. Fairfax's original investment was also deeply countercyclical and at objectively good value if the balance sheet could be sorted out, which Fairfax helped with. It wasn't just a bet on the jockey, although it was sold that way.
2. Atlas gave up peak profits in favour of long term contracts and newbuild orders, financed on phenomenal terms and entered into before the shipyards got full. It won the upcycle but this will only become apparent in the downcycle.

P

[Viking]

6 hours ago, petec said:

Nice summary. I would add:

1. Fairfax's original investment was also deeply countercyclical and at objectively good value if the balance sheet could be sorted out, which Fairfax helped with. It wasn't just a bet on the jockey, although it was sold that way.
2. Atlas gave up peak profits in favour of long term contracts and newbuild orders, financed on phenomenal terms and entered into before the shipyards got full. It won the upcycle but this will only become apparent in the downcycle.

P

@petec I agree with point 1.). There was more to the purchase than just Sokol and the Washington Family.
 

I am not sure about point 2.). Interest expense doubled year over year in Q1 from $40 to $80 million. Much higher borrowing costs are eating into earnings. My guess is this gets worse before it gets better. Not sure. But a watchout.

[petec]

13 hours ago, Viking said:

@petec I agree with point 1.). There was more to the purchase than just Sokol and the Washington Family.
 

I am not sure about point 2.). Interest expense doubled year over year in Q1 from $40 to $80 million. Much higher borrowing costs are eating into earnings. My guess is this gets worse before it gets better. Not sure. But a watchout.

 

Yes that's fair. I'd have to check my notes but from memory the financing is split between the secured facility (which is floating rate but has the huge advantage that they can move ships in and out of it) and individual ship financing which I THINK is mostly fixed/hedged.

 

My big concern with it was always that leases aren't inflation-linked. There is opex passthrough but the "financing" part of the leases are fixed. So yes, there is a risk they get squeezed. (Obviously the ship values do rise with inflation less depreciation, so there is inflation linkage over time, but that's cold comfort when you have leased a ship on a 10y contract and rates are rising.)

 

What really astonished me about the financings was the loan to value, which was close to 100% in some cases. Obviously that works both ways but there is headroom for a significant ROE!

[Viking]

Fairfax's equity holdings (that I track) finished Q2 up $766 million or about $33/share.

• mark to market = +$275 million
• associates =        +$364 million
• consolidated =    +$127 million 

This does not include the $260 million pre-tax gain from the sale of Ambridge which closed in Q2. Including Ambridge, that puts it over $1 billion in gains for the quarter from equities and realized gains. I do not track lots of Fairfax's holdings so the gain in equities is likely a little higher. 

 

The rub, of course, will be the bond portfolio. Interest rates spiked in Q2. And we have IFRS 17. So my guess is these two items will result in a sizeable unrealized loss. How much? Not sure; I need to give it more thought. Do others have an estimate? Bottom line, I love that interest rates are motoring higher. Fairfax still has a very short 2.5 year average duration with their fixed income portfolio. I wonder if they are using the current spike in bond yields to move the average duration even further out.

----------

Back to the equity holdings. Below were the biggest movers in Q2:

• Eurobank +$378 million
• FFH TRS  +$165 million
• Thomas Cook India +$84 million
• Stelco  -$78 million

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I have attached my Excel spreadsheet if board members want a closer look.

Fairfax Equity Holdings June 30 2023.xlsx

Edited July 1, 2023 by Viking

[Thrifty3000]

10 hours ago, Viking said:

Fairfax's equity holdings (that I track) finished Q2 up $766 million or about $33/share.

• mark to market = +$275 million
• associates =        +$364 million
• consolidated =    +$127 million 

This does not include the $260 million pre-tax gain from the sale of Ambridge which closed in Q2. Including Ambridge, that puts it over $1 billion in gains for the quarter from equities and realized gains. I do not track lots of Fairfax's holdings so the gain in equities is likely a little higher. 

 

The rub, of course, will be the bond portfolio. Interest rates spiked in Q2. And we have IFRS 17. So my guess is these two items will result in a sizeable unrealized loss. How much? Not sure; I need to give it more thought. Do others have an estimate? Bottom line, I love that interest rates are motoring higher. Fairfax still has a very short 2.5 year average duration with their fixed income portfolio. I wonder if they are using the current spike in bond yields to move the average duration even further out.

----------

Back to the equity holdings. Below were the biggest movers in Q2:

• Eurobank +$378 million
• FFH TRS  +$165 million
• Thomas Cook India +$84 million
• Stelco  -$78 million

----------

I have attached my Excel spreadsheet if board members want a closer look.

Fairfax Equity Holdings June 30 2023.xlsx 189.73 kB · 6 downloads

Looking at the interest rate sensitivity table from the Q1 report it looks to me like bonds will take a roughly $500 million hit.

 

A 100 basis point interest rate increase would be a $700 million hit. I’m assuming rates increased roughly 70 basis points during the quarter.

 

Also, last year FFH had interest rate hedges that would have reduced the impact of rising rates. It appears they did not hold anymore of these hedges as of the end of Q1.

Edited July 1, 2023 by Thrifty3000

[glider3834]

9 hours ago, Thrifty3000 said:

Looking at the interest rate sensitivity table from the Q1 report it looks to me like bonds will take a roughly $500 million hit.

 

A 100 basis point interest rate increase would be a $700 million hit. I’m assuming rates increased roughly 70 basis points during the quarter.

 

Also, last year FFH had interest rate hedges that would have reduced the impact of rising rates. It appears they did not hold anymore of these hedges as of the end of Q1.

With IFRS 17 accounting I would expect higher rates should also result in higher discount rate being applied to their insurance liabilities/ reserves and reducing PV of these liabilities, which should offset the MTM loss on their bonds. 

 

Also any rates impact should be greater on their reserves which are longer in duration and larger in size than their bond portfolio.

Edited July 1, 2023 by glider3834

[glider3834]

37 minutes ago, glider3834 said:

With IFRS 17 accounting I would expect higher rates should also result in higher discount rate being applied to their insurance liabilities/ reserves and reducing PV of these liabilities, which should offset the MTM loss on their bonds. 

 

Also any rates impact should be greater on their reserves which are longer in duration and larger in size than their bond portfolio.

I also think this IFRS 17 accounting shift is potentially one reason why they were comfortable entering into forward contracts to buy around $3B in Treasuries in Q1 and effectively lock in rate - as they don't need to be as concerned about BV impact from MTM.

 

I can't see why they wouldn't continue to make these types of moves if they like where interest rates are & they want to extend duration further. But lets wait & see what they do.

Edited July 1, 2023 by glider3834