Fairfax stock positions

[Viking]

Fairfax Total Return Swaps – A stealth buyback of 1.96 million shares?

 

(Hat tip to @SafetyinNumbers for helping me with this post.)

 

Fairfax’s second largest equity holding is the total return swaps that it holds giving it exposure to 1.76 million Fairfax shares (FFH-TRS). The position has a notional value of $3.0 billion at May 27, 2025. This position represents about 12% of Fairfax’s total equity portfolio of $24.3 billion.

 

 

Fairfax put on this position in late 2020/early 2021 when their shares were trading at a ridiculously low price (US$373/share). The initial position size was 1.96 million shares. In Q4, 2024, Fairfax reduced the position to 1.76 million shares (more on this later in the post). 

 

When they put this position on, Fairfax was thinking big - below is what Prem had to say in Fairfax’s 2020 annual report: 

 

“We think this will be a great investment for Fairfax, perhaps our best yet!” Prem Watsa 2020AR

 

How has the investment performed over the past 4.5 years?

 

Since being put on, the FFH-TRS position has delivered to Fairfax a total return of about $2.54 billion. This is before carrying costs. That is an exceptional return over a 4.5-year period. As Fairfax telegraphed in their 2020 annual report, the FFH-TRS has become one of their best investments ever.

 

The total return for this investment can be calculated by adding together two components:

• The increase in market value of the current position = $2.34 billion
• The increase in value of the position that was exited in Q4, 2024 = $208 million

The FFH-TRS investment is just one example of the many exceptional investments/decisions the team at Fairfax have made over the past 7 or 8 years. The value creation for Fairfax and its shareholders has been enormous. Over the past 5 years the senior management team at Fairfax has been delivering a master class in how to do capital allocation. This might sound like hyperbole – but it isn’t. 

 

The genius of the FFH-TRS investment has been lost on many investors/analysts. Probably because a total return swap is a non-traditional type of investment for a P/C insurance company to make (it is a tool more commonly used by hedge funds). So, it has been largely ignored by investors/analysts in their analysis of the company and its potential impact on earnings. This is one reason why investors/analysts have been consistently too low with their earnings estimates for Fairfax.

 

Given the importance of this investment, let’s review it in more detail.

 

 

Margin of safety

 

Was Fairfax’s investment in FFH-TRS made with a margin of safety?

 

The traditional way to value an insurance company is to use price to book value (P/BV). 

 

Fairfax’s FFH-TRS investment was established in late 2020/early 2021 at an average price of $373/share. At December 31, 2020, Fairfax’s book value was $478.33/share. Fairfax established their position at a P/BV multiple of 0.78. 

 

Fairfax’s purchase was made with a very large margin of safety.  

 

 

Circle of competence

 

Was the FFH-TRS in Fairfax’s circle of competence?

 

Yes, this is a stupid question. Fairfax understood this investment better than anyone else. Back in late 2020/early 2021 – Fairfax KNEW what Fairfax was worth. They knew the company was being criminally undervalued by Mr. Market. And they yelled it from the roof tops – in June of 2020, CEO Prem Watsa bought $150 million in stock paying $311/share.

 

So, this was a HIGH CERTAINTY investment for Fairfax - which also made it a very low risk investment for Fairfax.

 

The quote below is from Fairfax’s news release from June 15, 2020:

-----------

Prem Watsa Acquires Additional Shares of Fairfax

 

Mr. Watsa commented as follows in connection with this purchase: “At our AGM and on our first quarter earnings release call, I said that our shares are ‘ridiculously cheap’. That statement reflected my recognition that in the 35 years since Fairfax began, I have never seen Fairfax shares sell at a bigger discount to their intrinsic value than they have recently. I have now backed up my strong words by purchasing close to US$150 million of Fairfax shares in the market over the last few days, as I believe that this will be an excellent long term investment.” Fairfax news release June 15, 2020

------------

Position size

 

What should an investor do when they find a great investment that they understand better than anybody else and it is trading at a historically cheap valuation?

 

They should ‘back up the truck.’ They should make the investment a concentrated position. 

 

What did Fairfax do?

 

They got out their elephant gun. In late 2020/early 2021 Fairfax established a position in FFH-TRS that gave them exposure to 1.96 million Fairfax shares. This position represented 7.5% of Fairfax’s effective shares outstanding (26.18 million).

 

 

How did Fairfax pay?

 

The FFH-TRS position had a notional value of $731 million. That is what it would have cost Fairfax to buy 1.96 million shares.

 

 

Back in late 2020/early 2021, Fairfax did not have a lot of extra cash. The hard market in P/C insurance was taking off. Therefore, the priority for excess capital was to grow the P/C insurance business. Fairfax also closed out its last short position in December 2020 and this resulted in a $529 million investment loss. 

 

So, Fairfax got creative. They pulled a play from the hedge fund playbook. They didn’t buy shares directly. They did the next best thing… they put on the FFH-total return swap position. This kept their capital outlay to a minimum. And they got exposure to the underlying stock (without actually owning it). 

 

This investment demonstrates Fairfax’s management team at their best

 

FFH-TRS investment:

• Purchased with a large margin of safety 
• In their circle of competence
• Concentrated position.
• Very creative in execution – used total return swaps

With this investment, Fairfax was very rational. And opportunistic. 

 

The FFH-TRS has been a brilliant investment by Fairfax - especially given the circumstances.

 

What is the outlook for this investment?

 

Three things are happening at Fairfax at the same time:

• Growing earnings – The fundamentals of the company continue to improve.
• Multiple expansion – Sentiment/narrative is improving.
• Lower share count – Company continues to be aggressive buying back shares.

As a result, Fairfax’s share price has spiked higher in recent years. 

 

Despite the big move higher, Fairfax’s share price today continues to trade at a discount – especially when compared to P/C insurance peers. 

 

Bottom line, the outlook for the FFH-TRS investment is very good. 

 

What is Fairfax’s exit strategy for this investment? 

 

At the end of the day, the FFH-TRS position is an investment for Fairfax. Like all their investments, they have an exit strategy. 

 

In Q4, 2024, Fairfax did reduce the position size by 203,800 shares, from 1.96 million shares to 1.76 million shares.

 

Why did they do this? 

 

Perhaps the primary reason was to reduce the position size of the investment. Not because they felt the investment had become fully valued. 

 

But guess what happened to the shares?

 

The 203,800 shares were purchased (and cancelled) from the counterparty by Fairfax. The reduction in the FFH-TRS position ended up being executed as a share buyback by Fairfax.

 

The cost buy back 203,800 shares in December 2024 was about $284 million ($1,393/share). In 2024, the FFH-TRS investment increased in value by about $922 million. The buyback was funded from the increase in the value of the position.  

 

This might explain what Fairfax’s end game is with its FFH-TRS investment – it is really a stealth buyback of 1.9 million Fairfax shares. With the buyback funded over time by the return being delivered by the investment. Yes, that is brilliant capital allocation.

 

 —————

 

A note on share buybacks

 

Fairfax has said they believe their stock is very undervalued. They have also said that as the hard market in insurance slows, they will look to use excess capital to buy back their stock more aggressively (and that is what we saw them do in 2024).

 

Every $100 increase in the Fairfax’s share price equals a $175 million investment gain (pre-tax) on the FFH-TRS position. The FFH-TRS investment makes share buybacks an even more compelling capital allocation decision for Fairfax.

 

Is the FFH-TRS investment just like a buyback? 

 

When Fairfax buys back stock, the company (and investors) get a double benefit to EPS:

• The FFH-TRS investment increases the numerator (earnings).
• Buybacks lower the denominator (per share). 

The FFH-TRS is the next best thing to doing a big buyback. 

 

 —————

 

An underappreciated investment within the analyst community

 

Analysts really struggled to understand the FFH-TRS investment. This can be seen in the Q&A portion of Fairfax’s Q4, 2020 conference call that took place in February of 2021. 

 

Prem’s answer to question from Mark Dwelle (RBC) on the Q4 conference call in February of 2021.

 

Mark Dwelle: “My second question relates to executing the total return swap with respect to Fairfax shares. I guess, I was just curious why you pursue that structure, rather than just buying back the stock, if you felt like that was the good opportunity? I mean, is this a capital constraint that you couldn't really buy back that much?”

 

Prem Watsa: “…yes, we have to be very careful in terms of how much we can buy back. When we looked at Fairfax as a stock and looked at everything else that we could buy... we paid US$344 per shares, our book value is $478. I mean, if you (do) the math, just on (a) book value basis, we'd have about $200 million gain. And Fairfax stock price for book value is worth another 200 million. We just think it's a terrific investment and our total return swap structure was a very good way for us to do it. And so we did it.”

 

Why buy the TRS-FFH versus simply buying back stock?

 

Fairfax did not have the cash at the time to buy back a significant amount of Fairfax stock directly. 

 

Again, from the Q4 2021 conference call.

 

Mark Dwelle: “I don't disagree with you that it was a good strike price, I guess it was really -- the form of the transaction rather than just actually buying the shares, using a derivative instead is just -- it's a little bit unusual. I haven't usually seen that with most of the companies that I've followed. So that was really my main question.”

 

Prem Watsa: “Yes, so, Mark, our point is just that we wanted to… have more than $1 billion in cash … we just wanted to be financially sound, and in all ways, as opposed to use that cash at this point in time.”

 

 —————

 

Comments from Prem about the total return swap position from the 2020AR. (Please note, in early 2021, Fairfax increased the size of the FFH-TRS position from 1.4 to 1.96 million shares).

 

“Throughout much of last year following the pandemic-induced market plunge, I made public statements to the effect that our belief was that Fairfax shares were trading in the market at a ridiculously cheap price. In the summer I backed that up by personally purchasing close to $150 million of shares. Additionally, following our value investing philosophy, since the latter part of 2020 Fairfax has purchased total return swaps with respect to 1.4 million subordinate voting shares of Fairfax with a total market value at the time of those agreements of $484.9 million ($344.45 per share). We think this will be a great investment for Fairfax, perhaps our best yet!”

 

 

“Investment returns are very sensitive to end date values, so with a stock price of only $341 per share at the end of December 2020, our five and ten year and longer returns have been affected. We expect this to change as Fairfax begins to reflect intrinsic values again. Nothing that a $1,000 share price won’t solve!” Prem Watsa Fairfax 2020AR

 

 —————

 

Total Return Swap: Some Additional Details

 

The other major benefit of a total return swap is that it enables the TRS receiver to make a leveraged investment, thus making maximum use of its investment capital. Unlike in a repurchase agreement where there is a transfer of asset ownership, there is no ownership transfer in a TRS contract.

 

This means that the total return receiver does not have to lay out substantial capital to purchase the asset. Instead, a TRS allows the receiver to benefit from the underlying asset without actually owning it, making it the most preferred form of financing for hedge funds and Special Purpose Vehicles.

 

There are several types of risk that parties in a TRS contract are subjected to. One of these is counterparty risk. When a hedge fund enters into multiple TRS contracts on similar underlying assets, any decline in the value of these assets will result in reduced returns as the fund continues to make regular payments to the TRS payer/owner.

 

If the decline in the value of assets continues over an extended period and the hedge fund is not adequately capitalized, the payer will be at risk of the fund’s default. The risk may be heightened by the high secrecy of hedge funds and the treatment of such assets as off-balance sheet items.

 

Both parties in a TRS contract are affected by interest rate risk. The payments made by the total return receiver are equal to LIBOR +/- an agreed-upon spread. An increase in LIBOR during the agreement increases payments due to the payer, while a decrease in LIBOR decreases the payments to the payer. Interest rate risk is higher on the receiver’s side, and they may hedge the risk through interest rate derivatives such as futures.

 

https://corporatefinanceinstitute.com/resources/derivatives/total-return-swap-trs/

Edited May 27, 2025 by Viking

[SafetyinNumbers]

13 minutes ago, Viking said:

Fairfax Total Return Swaps – A stealth buyback of 1.96 million shares?

 

Hat tip to @SafetyinNumbers 

 

Fairfax’s second largest equity holding is the total return swaps that it holds giving it exposure to 1.76 million Fairfax shares (FFH-TRS). The position has a notional value of $3.0 billion at May 27, 2024. This position represents about 12% of Fairfax’s total equity portfolio of $24.3 billion.

 

 

Fairfax put on this position in late 2020/early 2021 when their shares were trading at a ridiculously low price (US$373/share). The initial position size was 1.96 million shares. In Q4, 2024, Fairfax reduced the position to 1.76 million shares (more on this later in the post). 

 

When they put this position on, Fairfax was thinking big - below is what Prem had to say in Fairfax’s 2020 annual report: 

 

“We think this will be a great investment for Fairfax, perhaps our best yet!” Prem Watsa 2020AR

 

How has the investment performed over the past 4.5 years?

 

Since being put on, the FFH-TRS position has delivered to Fairfax a total return of about $2.54 billion. This is before carrying costs. That is an exceptional return over a 4.5-year period. As Fairfax telegraphed in their 2020 annual report, the FFH-TRS has become one of their best investments ever.

 

The total return for this investment can be calculated by adding together two components:

• The increase in market value of the current position = $2.34 billion
• The increase in value of the position that was exited in Q4, 2024 = $208 million

The FFH-TRS investment is just one example of the many exceptional investments/decisions the team at Fairfax have made over the past 7 or 8 years. The value creation for Fairfax and its shareholders has been astronomical. Over the past 5 years the senior management team at Fairfax has been delivering a master class in how to do capital allocation. This might sound like hyperbole – but it isn’t. 

 

The genius of the FFH-TRS investment has been lost on many investors/analysts. Probably because a total return swap is a non-traditional type of investment for a P/C insurance company to make (it is a tool more commonly used by hedge funds). So, it has been largely ignored by investors/analysts in their analysis of the company and its potential impact on earnings. This is one reason why investors/analysts have been consistently too low with their earnings estimates for Fairfax.

 

Given the importance of this investment, let’s review it in more detail.

 

 

Margin of safety

 

Was Fairfax’s investment in FFH-TRS made with a margin of safety?

 

The traditional way to value an insurance company is to use price to book value (P/BV). 

 

Fairfax’s FFH-TRS investment was established in late 2020/early 2021 at an average price of $373/share. At December 31, 2020, Fairfax’s book value was $478.33/share. Fairfax established their position at a P/BV multiple of 0.78. 

 

Fairfax’s purchase was made with a very large margin of safety.  

 

 

Circle of competence

 

Was the FFH-TRS in Fairfax’s circle of competence?

 

Yes, this is a stupid question. Fairfax understood this investment better than anyone else. Back in late 2020/early 2021 – Fairfax KNEW what Fairfax was worth. They knew the company was being criminally undervalued by Mr. Market. And they yelled it from the roof tops – in June of 2020, CEO Prem Watsa bought $150 million in stock paying $311/share.

 

So, this was a HIGH CERTAINTY investment for Fairfax - which also made it a very low risk investment for Fairfax.

 

The quote below is from Fairfax’s news release from June 15, 2020:

-----------

Prem Watsa Acquires Additional Shares of Fairfax

 

Mr. Watsa commented as follows in connection with this purchase: “At our AGM and on our first quarter earnings release call, I said that our shares are ‘ridiculously cheap’. That statement reflected my recognition that in the 35 years since Fairfax began, I have never seen Fairfax shares sell at a bigger discount to their intrinsic value than they have recently. I have now backed up my strong words by purchasing close to US$150 million of Fairfax shares in the market over the last few days, as I believe that this will be an excellent long term investment.” Fairfax news release June 15, 2020

------------

Position size

 

What should an investor do when they find a great investment that they understand better than anybody else and it is trading at a historically cheap valuation?

 

They should ‘back up the truck.’ They should make the investment a concentrated position. 

 

What did Fairfax do?

 

They got out their elephant gun. In late 2020/early 2021 Fairfax established a position in FFH-TRS that gave them exposure to 1.96 million Fairfax shares. This position represented 7.5% of Fairfax’s effective shares outstanding (26.18 million).

 

 

How did Fairfax pay?

 

The FFH-TRS position had a notional value of $731 million. That is what it would have cost Fairfax to buy 1.96 million shares.

 

 

Back in late 2020/early 2021, Fairfax did not have a lot of extra cash. The hard market in P/C insurance was taking off. Therefore, the priority for excess capital was to grow the P/C insurance business. Fairfax also closed out its last short position in December 2020 and this resulted in a $529 million investment loss. 

 

So, Fairfax got creative. They pulled a play from the hedge fund playbook. They didn’t buy shares directly. They did the next best thing… they put on the FFH-total return swap position. This kept their capital outlay to a minimum. And they got exposure to the underlying stock (without actually owning it). 

 

This investment demonstrates Fairfax’s management team at their best

 

FFH-TRS investment:

• Purchased with a large margin of safety 
• In their circle of competence
• Concentrated position.
• Very creative in execution – used total return swaps

With this investment, Fairfax was very rational. And opportunistic. 

 

The FFH-TRS has been a brilliant investment by Fairfax - especially given the circumstances.

 

What is the outlook for this investment?

 

Three things are happening at Fairfax at the same time:

• Growing earnings – The fundamentals of the company continue to improve.
• Multiple expansion – Sentiment/narrative is improving.
• Lower share count – Company continues to be aggressive buying back shares.

As a result, Fairfax’s share price has spiked higher in recent years. 

 

Despite the big move higher, Fairfax’s share price today continues to trade at a discount – especially when compared to P/C insurance peers. 

 

Bottom line, the outlook for the FFH-TRS investment is very good. 

 

What is Fairfax’s exit strategy for this investment? 

 

At the end of the day, the FFH-TRS position is an investment for Fairfax. Like all their investments, they have an exit strategy. 

 

In Q4, 2024, Fairfax did reduce the position size by 203,800 shares, from 1.96 million shares to 1.76 million shares.

 

Why did they do this? 

 

Perhaps the primary reason was to reduce the position size of the investment. Not because they felt the investment had become fully valued. 

 

But guess what happened to the shares?

 

The 203,800 shares were purchased (and cancelled) from the counterparty by Fairfax. The reduction in the FFH-TRS position ended up being executed as a share buyback by Fairfax.

 

The cost buy back 203,800 shares in December 2024 was about $284 million ($1,393/share). In 2024, the FFH-TRS investment increased in value by about $922 million. The buyback was funded from the increase in the value of the position.  

 

This might explain what Fairfax’s end game is with its FFH-TRS investment – it is really a stealth buyback of 1.9 million Fairfax shares. With the buyback funded over time by the return being delivered by the investment. Yes, that is brilliant capital allocation.

 

 —————

 

A note on share buybacks

 

Fairfax has said they believe their stock is very undervalued. They have also said that as the hard market in insurance slows, they will look to use excess capital to buy back their stock more aggressively (and that is what we saw them do in 2024).

 

Every $100 increase in the Fairfax’s share price equals a $175 million investment gain (pre-tax) on the FFH-TRS position. The FFH-TRS investment makes share buybacks an even more compelling capital allocation decision for Fairfax.

 

Is the FFH-TRS investment just like a buyback? 

 

When Fairfax buys back stock, the company (and investors) get a double benefit to EPS:

• The FFH-TRS investment increases the numerator (earnings).
• Buybacks lower the denominator (per share). 

The FFH-TRS is the next best thing to doing a big buyback. 

 

 —————

 

An underappreciated investment within the analyst community

 

Analysts really struggled to understand the FFH-TRS investment. This can be seen in the Q&A portion of Fairfax’s Q4, 2020 conference call that took place in February of 2021. 

 

Prem’s answer to question from Mark Dwelle (RBC) on the Q4 conference call in February of 2021.

 

Mark Dwelle: “My second question relates to executing the total return swap with respect to Fairfax shares. I guess, I was just curious why you pursue that structure, rather than just buying back the stock, if you felt like that was the good opportunity? I mean, is this a capital constraint that you couldn't really buy back that much?”

 

Prem Watsa: “…yes, we have to be very careful in terms of how much we can buy back. When we looked at Fairfax as a stock and looked at everything else that we could buy... we paid US$344 per shares, our book value is $478. I mean, if you (do) the math, just on (a) book value basis, we'd have about $200 million gain. And Fairfax stock price for book value is worth another 200 million. We just think it's a terrific investment and our total return swap structure was a very good way for us to do it. And so we did it.”

 

Why buy the TRS-FFH versus simply buying back stock?

 

Fairfax did not have the cash at the time to buy back a significant amount of Fairfax stock directly. 

 

Again, from the Q4 2021 conference call.

 

Mark Dwelle: “I don't disagree with you that it was a good strike price, I guess it was really -- the form of the transaction rather than just actually buying the shares, using a derivative instead is just -- it's a little bit unusual. I haven't usually seen that with most of the companies that I've followed. So that was really my main question.”

 

Prem Watsa: “Yes, so, Mark, our point is just that we wanted to… have more than $1 billion in cash … we just wanted to be financially sound, and in all ways, as opposed to use that cash at this point in time.”

 

 —————

 

Comments from Prem about the total return swap position from the 2020AR. (Please note, in early 2021, Fairfax increased the size of the FFH-TRS position from 1.4 to 1.96 million shares).

 

“Throughout much of last year following the pandemic-induced market plunge, I made public statements to the effect that our belief was that Fairfax shares were trading in the market at a ridiculously cheap price. In the summer I backed that up by personally purchasing close to $150 million of shares. Additionally, following our value investing philosophy, since the latter part of 2020 Fairfax has purchased total return swaps with respect to 1.4 million subordinate voting shares of Fairfax with a total market value at the time of those agreements of $484.9 million ($344.45 per share). We think this will be a great investment for Fairfax, perhaps our best yet!”

 

 

“Investment returns are very sensitive to end date values, so with a stock price of only $341 per share at the end of December 2020, our five and ten year and longer returns have been affected. We expect this to change as Fairfax begins to reflect intrinsic values again. Nothing that a $1,000 share price won’t solve!” Prem Watsa Fairfax 2020AR

 

 —————

 

Total Return Swap: Some Additional Details

 

The other major benefit of a total return swap is that it enables the TRS receiver to make a leveraged investment, thus making maximum use of its investment capital. Unlike in a repurchase agreement where there is a transfer of asset ownership, there is no ownership transfer in a TRS contract.

 

This means that the total return receiver does not have to lay out substantial capital to purchase the asset. Instead, a TRS allows the receiver to benefit from the underlying asset without actually owning it, making it the most preferred form of financing for hedge funds and Special Purpose Vehicles.

 

There are several types of risk that parties in a TRS contract are subjected to. One of these is counterparty risk. When a hedge fund enters into multiple TRS contracts on similar underlying assets, any decline in the value of these assets will result in reduced returns as the fund continues to make regular payments to the TRS payer/owner.

 

If the decline in the value of assets continues over an extended period and the hedge fund is not adequately capitalized, the payer will be at risk of the fund’s default. The risk may be heightened by the high secrecy of hedge funds and the treatment of such assets as off-balance sheet items.

 

Both parties in a TRS contract are affected by interest rate risk. The payments made by the total return receiver are equal to LIBOR +/- an agreed-upon spread. An increase in LIBOR during the agreement increases payments due to the payer, while a decrease in LIBOR decreases the payments to the payer. Interest rate risk is higher on the receiver’s side, and they may hedge the risk through interest rate derivatives such as futures.

 

https://corporatefinanceinstitute.com/resources/derivatives/total-return-swap-trs/

Thanks for the hat tip Viking but you did all the work! A really great note as usual!
 

I haven’t asked Prem but I think he bought those shares on margin given the size of the trade. To get all of his outlay back and keep a bunch of “free” shares is another masterful move but on a personal finance level in this case!

[Viking]

17 minutes ago, SafetyinNumbers said:

Thanks for the hat tip Viking but you did all the work! A really great note as usual!
 

I haven’t asked Prem but I think he bought those shares on margin given the size of the trade. To get all of his outlay back and keep a bunch of “free” shares is another masterful move but on a personal finance level in this case!

 

The FFH-TRS could well become Fairfax's best ever investment. And that is because the amount they likely had to put out was very small. And the return has been massive. 

 

Does anyone know how to calculate the return on an investment like this?

 

The FFH-TRS is also interesting as an investment. With this investment, Fairfax acted like a hedge fund. In my post on Recipe, Fairfax has acted like a private equity fund ('LBO light'). With their investment in Ki (and Digit before), Fairfax acted like a venture capital fund.  With their investment in PacWest (with Kennedy Wilson), Fairfax acted like a distress debt fund. Importantly, Fairfax has developed these capabilities largely internally. They also have a global presence (especially India). Fairfax is also partnered with some amazing entrepreneurs/individuals (with its basket of equity holdings).

 

It really is amazing the platform that Fairfax has built with its investment management business - it is incredibly diverse. This gives them an enormous amount of flexibility moving forward. They fish in so many different ponds. And they are very good at what they do. 

Edited May 27, 2025 by Viking

[Fisgard]

Appreciate all your posts Viking and safetyinnumbers.

This TRS trade fascinates me. It’s like a hedge fund but FFH is not a hedge fund.
I’m wondering if anyone could answer some questions I have:

- Who is on the other side of the trade? OMERS? 
- What is the arrangement for the other party? Floating rate plus a point or two?

- Is there a kicker on the exit?

- Why is Fairfax buying back shares instead of closing out the TRS? Is it because they still think the shares are selling at a discount? 

I have to admit I didn’t understand or appreciate the trade fully in 2021. But love it now that I have seen it play out.

Edited May 27, 2025 by Fisgard

[TwoCitiesCapital]

7 minutes ago, Fisgard said:

 

- Who is on the other side of the trade? OMERS? 

 

 

The banks have either hedges the exposure by buying shares in the market OR have offloaded the short to other participants (maybe a Muddy Waters or two) 

 

 

7 minutes ago, Fisgard said:

- What is the arrangement for the other party? Floating rate plus a point or two?

 

Typically is LIBOR/SOFR like rate plus a spread for both sides of the trade. The bank remains hedged with neutral exposure and collects the spread from both ends. 

 

7 minutes ago, Fisgard said:

- Is there a kicker on the exit?

 

Not sure what you mean by "kicker"

 

7 minutes ago, Fisgard said:

- Why is Fairfax buying back shares instead of closing out the TRS? Is it because they still think the shares are selling at a discount? 

 

 

The TRS offers them leverage they don't get via straight buyback. Also, each cash buyback continues to secularly benefit the TRS  where exiting the TRS doesn't really help the buyback scenario. Only reason to reduce/exit the TRS is to manage the liquidity risk. 

 

 

Edited May 27, 2025 by TwoCitiesCapital

[Fisgard]

23 minutes ago, TwoCitiesCapital said:

 

The banks have either hedges the exposure by buying shares in the market OR have offloaded the short to other participants (maybe a Muddy Waters or two) 

 

 

 

Typically is LIBOR/SOFR like rate plus a spread for both sides of the trade. The bank remains hedged with neutral exposure and collects the spread from both ends. 

 

 

Not sure what you mean by "kicker"

 

 

The TRS offers them leverage they don't get via straight buyback. Also, each cash buyback continues to secularly benefit the TRS  where exiting the TRS doesn't really help the buyback scenario. Only reason to reduce/exit the TRS is to manage the liquidity risk. 

 

 

Thanks TwoCitiesCapital:

- by kicker I mean is there a cost/fee charged to exit/payout the TRS.

[TwoCitiesCapital]

4 minutes ago, Fisgard said:

Thanks TwoCitiesCapital:

- by kicker I mean is there a cost/fee charged to exit/payout the TRS.

 

Not typically. 

 

There would be a return of the margin/collateral held against it and a final settlement of P/L. 

[Fisgard]

3 minutes ago, TwoCitiesCapital said:

 

Not typically. 

 

There would be a return of the margin/collateral held against it and a final settlement of P/L. 

What would be an example of final settlement of P/L on this trade?

[TwoCitiesCapital]

26 minutes ago, Fisgard said:

What would be an example of final settlement of P/L on this trade?

 

Whatever the P/L for the final period is. These things typically settle monthly or quarterly where net cash flows of the stock movement less financing costs get settled. This is where Fairfax either gets paid cash if the stock outperforms the financing rate or pays cash or it underperforms the rate. 

 

The only costs to close the position would be the final settlement of this P/L. 

[KFRCanuk]

I need <insert person> in a bubble bath explaining the TRS in a simplistic way. I still don't get it.

 

Almost seems like a reverse credit default swap as silly as that sounds.

[SafetyinNumbers]

5 minutes ago, KFRCanuk said:

I need <insert person> in a bubble bath explaining the TRS in a simplistic way. I still don't get it.

 

Almost seems like a reverse credit default swap as silly as that sounds.

basically what if is. Just long instead of short.

[nwoodman]

2 hours ago, KFRCanuk said:

I need <insert person> in a bubble bath explaining the TRS in a simplistic way. I still don't get it.

 

Almost seems like a reverse credit default swap as silly as that sounds.

Think of a TRS (Total Return Swap) as renting the bank’s balance sheet at SOFR (formerly LIBOR) plus a spread. The bank buys the shares for you, but you assume all the market risk, including both the upside and the downside. It’s essentially synthetic leverage. You benefit if the share price rises, but you take the hit if it falls.

 

There’s no short hedge involved, but a share overhang can occur when you unwind the position, unless you buy the shares outright from the bank or on the market.

 

It’s a bit like a reverse credit default swap in spirit—just with equity risk instead of credit risk. 

 

This might help

https://www.investopedia.com/terms/t/totalreturnswap.asp

 

Edit: While it is all very exciting, I think there are a number of us who would be happy to see this trade wound off sooner rather than later

 

Edited May 28, 2025 by nwoodman

[villainx]

18 minutes ago, nwoodman said:

Edit: While it is all very exciting, I think there are a number of us who would be happy to see this trade wound off sooner rather than later

 

Why is this so?  Fairfax presumably would be in best position to know when to unwound, right?  Or does risk increase as Fairfax stock price gets closer to fair value?

 

 

[nwoodman]

26 minutes ago, villainx said:

 

Why is this so?  Fairfax presumably would be in best position to know when to unwound, right?  Or does risk increase as Fairfax stock price gets closer to fair value?

 

 

Fairfax is certainly in the best position to time the unwind from an informational standpoint. However, from a risk-reward perspective, there are still good reasons to prefer that the TRS be closed sooner, and on their terms.

 

The gap to intrinsic value has narrowed significantly, even if some upside remains. Fairfax can still buy back shares in the open market without additional leverage as long as the discount persists.

 

Leverage cuts both ways, as we know. There are the usual existential risks to the trade, such as counterparty risk, regulatory scrutiny, or shifts in market sentiment, that are beyond their control. Better to secure the win and reduce exposure while the setup is favourable.   

 

They’ve already begun unwinding the position, so a continued, phased reduction would, in my view, underscore the prudence and discipline of their capital allocation approach. 

 

 

 

[Hoodlum]

Eurobank officially confirms Fairfax's participation in the share buybacks.

 

https://www.eurobankholdings.gr/en/grafeio-tupou/etairiki-anakoinosi-28-05-2025

 

Fairfax, the largest shareholder of Eurobank Holdings, announces its intention to participate in the previously announced Eurobank Holdings share buyback programme of up to 367,673,632 shares of Eurobank Holdings, in order to maintain its total equity stake in Eurobank Holdings close to, but below, the regulatory threshold of 33% of Eurobank Holdings’ voting rights.

[nwoodman]

14 minutes ago, Hoodlum said:

Eurobank officially confirms Fairfax's participation in the share buybacks.

 

https://www.eurobankholdings.gr/en/grafeio-tupou/etairiki-anakoinosi-28-05-2025

 

Fairfax, the largest shareholder of Eurobank Holdings, announces its intention to participate in the previously announced Eurobank Holdings share buyback programme of up to 367,673,632 shares of Eurobank Holdings, in order to maintain its total equity stake in Eurobank Holdings close to, but below, the regulatory threshold of 33% of Eurobank Holdings’ voting rights.

A beautiful thing

 

A cracking start in Europe, up 5%, and not surprising given they can now do the full 10% buyback  unimpeded.  Win/win

Edited May 28, 2025 by nwoodman

[Hoodlum]

11 minutes ago, nwoodman said:

A beautiful thing

 

A cracking start in Europe, up 5%, and not surprising given they can now do the full 10% buyback  unimpeded.  Win/win

 

This announcement from Eurobank/Fairfax would seem like an obvious direction they would take, from my perspective.  So I am a bit surprised that the market reacted like they did to this.  I guess the market held back on buying more until then.  ¯\_(ツ)_/¯

[nwoodman]

22 minutes ago, Hoodlum said:

 

This announcement from Eurobank/Fairfax would seem like an obvious direction they would take, from my perspective.  So I am a bit surprised that the market reacted like they did to this.  I guess the market held back on buying more until then.  ¯\_(ツ)_/¯

That’s because you are rational and smart .

[Hektor]

9 hours ago, nwoodman said:

Edit: While it is all very exciting, I think there are a number of us who would be happy to see this trade wound off sooner rather than later

+1

[Hektor]

1 hour ago, Hoodlum said:

Eurobank officially confirms Fairfax's participation in the share buybacks.

 

https://www.eurobankholdings.gr/en/grafeio-tupou/etairiki-anakoinosi-28-05-2025

 

Fairfax, the largest shareholder of Eurobank Holdings, announces its intention to participate in the previously announced Eurobank Holdings share buyback programme of up to 367,673,632 shares of Eurobank Holdings, in order to maintain its total equity stake in Eurobank Holdings close to, but below, the regulatory threshold of 33% of Eurobank Holdings’ voting rights.

[villainx]

Why would Fairfax have to participate in the buyback?  If Eurobank Holding is buying back, wouldn't Fairfax ownership % increase naturally?  I'm thinking mostly along the lines of Tencent buyback and Prosus's %.  Or Eurobank is buying a different class of shares?

 

 

 

 

 

[gfp]

1 minute ago, villainx said:

Why would Fairfax have to participate in the buyback?  If Eurobank Holding is buying back, wouldn't Fairfax ownership % increase naturally?  I'm thinking mostly along the lines of Tencent buyback and Prosus's %.  Or Eurobank is buying a different class of shares?

 

 

 

 

 

 

Because Fairfax isn't allowed to own more than 33% of Eurobank

[villainx]

1 minute ago, gfp said:

Because Fairfax isn't allowed to own more than 33% of Eurobank

 

Duh, they have to sell into the buyback.  

 

And this is press release for something that was already planned?  or something new?

 

 

[gfp]

10 minutes ago, villainx said:

 

Duh, they have to sell into the buyback.  

 

And this is press release for something that was already planned?  or something new?

 

 

 

As I understand it, what is new is the announcement that Fairfax will participate in the company's repurchase activity by selling pro-rata directly to the company so it doesn't continually bump into the 33% threshold, sell in the open market, repeat

[dartmonkey]

2 hours ago, Hoodlum said:

Fairfax, the largest shareholder of Eurobank Holdings, announces its intention to participate in the previously announced Eurobank Holdings share buyback programme of up to 367,673,632 shares of Eurobank Holdings, in order to maintain its total equity stake in Eurobank Holdings close to, but below, the regulatory threshold of 33% of Eurobank Holdings’ voting rights.

 

What does this even mean? If Eurobank repurchases its own shares, that would mean that all investors' percentage holdings of the company would increase, as long as the don't sell their shares. Fairfax has recently had to sell shares on the market to remain below their allowed 33.3% stake. So it would make no sense for Fairfax to also repurchase shares, alongside Eurobank. If anything, it might mean that Fairfax would be tendering its shares to Eurobank, so as not to break through the 33.3% cap. (Edit: While I was typing this, villainx and gfp said essentially the same thing...)

Edited May 28, 2025 by dartmonkey