Fairfax stock positions

[Parsad]

12 hours ago, Pedro said:

Wondering if the below excerpt from the 2020 annual report is a sign that they sold some BB. An additional $1.5B to manage for Wade & Lawrence had to come from somewhere. Maybe a clue by Prem? or maybe  me reaching/hearing what I want to hear..

 

Wade and Lawrence had an excellent year in 2020 managing $1.5 billion in invested assets. They did so well that we will give them another $1.5 billion to manage in 2021. At that rate, they will soon be managing the whole portfolio! (No clapping please!)

 

 

Possibly, but probably not.  Most likely gave them some of the cash assets in the portfolio to manage.  Cheers!

[Xerxes]

Couple of comments as we are approaching the AGM. I don't know when before 2020 FFH entered this arrangement with Chorus, but it showed their interest in the aerospace infrastructure asset.

"Fairfax invested Cdn$200 million in debt yielding 6% per annum and warrants which yield Fairfax an implied ownership of 13% in Chorus Aviation, which operates Air Canada’s Jazz regional airline business. Air Canada has a 9.6% stake in Chorus. There is no question that COVID-19 has been catastrophic for the airline industry. That said, Joe Randell and his team have done an outstanding job managing the cost structure of Jazz with its partner, Air Canada. Chorus is still being paid its fixed fee under the Air Canada contract. In addition, Chorus is currently seeing very exciting opportunities in the leasing space as all airlines, including the majors, look to move planes off their balance sheet. While our warrants are currently well out of the money (strike price Cdn$8.25 per share), we are confident the business of Chorus and its partner Air Canada will swiftly recover when travel once again resumes." FFH 2020 Letter for Shareholders

Reason i am bring this up is because not long ago, about in Q2 2020, Air Canada did a stock offering as well as convertible offering post-Covid crash. The convertible were told to be sold as a private placement. Of course it could be anyone buying, but given their previous interest in the sector, this would have been an interesting time for them to buy a piece of Air Canada at distress price (without needing 13F disclosure because it is convertible?). It could also be Brookfield Business Partners, given that it actually hired Air Canada CEO as a Senior Advisor and is looking at the aerospace sector very closely for investment.

"for aggregate gross proceeds of C$500,500,000 and its concurrent marketed private placement of convertible senior unsecured notes due 2025 ("Convertible Notes") for aggregate gross proceeds of US$650,000,000 (the "Convertible Notes Offering" and together with the Share Offering, the "Offerings"). The Convertible Notes will bear interest semi-annually in arrears at a rate of 4.000% per annum and will mature on July 1, 2025, unless earlier repurchased, redeemed or converted. The initial conversion rate of the Convertible Notes is 65.1337 Shares per US$1,000 principal amount of Convertible Notes, or an initial conversion price of approximately US$15.35 per Share. The Convertible Notes will be convertible into cash, Class A Variable Voting Shares and/or Class B Voting Shares of the Company or a combination thereof, at the Company's election."

[Xerxes]

Finally, I recommend folks to read Markel 2020 letter to shareholders. Here are two passages that are interesting:

"Tactically, that decision can be criticized as it caused us to reduce our equity exposure by approximately 20% at lower prices than prevailed at the end of 2020."

"In May we raised $600 million of preferred equity to increase the conservatism and heft of our balance sheet and to help fund our growth opportunities. The preferred stock is callable beginning in 2025." 

One can of course understand the reason for these decisions by Markel, but when squared against what FFH did faced with the same unknowns and landscape, there were no equity issuance (preferred or common) at distress prices. They tapped their line of credit. I recall Amazon following dot.com crash but was largely applauded by raising debt right before and not issuing equity after the crash to survive. What do Amazon and FFH have in common, nothing except that both are led by founder-CEO-operator that cares a lot of his % ownership of the franchise. I don't know how much of Markel does T. Gayner has and i understand that issuing preferred shares are probably not as bad as issuing common equity but still.

 

Lastly, FFH took advantage of the situation:

"Net gains on bonds of $460 million includes net gains on corporate bonds of $474 million and net losses of $35 million on government bonds (inclusive of losses on treasury locks of $102 million). The majority of the gains on corporate bonds were from bonds purchased in the first and second quarters of 2020 when credit spreads widened."

"After the March/April crash in the stock market, we could not resist buying Exxon shares at a dividend yield of 10.5%, Canadian banks at an average yield of 6.1% and some other companies like Royal Dutch Shell, Alphabet, FedEx and Helmerich & Payne at very attractive prices. We sold approximately half of them in 2020 for a profit of $212 million or an average gain of 40% on our investment."

Now, both of these series of investments by FFH were probably done not with new money, but by re-allocation. But still i prefer that than Markel's liquidating 20% of its equity exposure.

 

[petec]

Back of the envelope, I think STLC and RFP combined could dividend $200m to Fairfax this year.

In fact I think these two companies plus Eurobank are likely to have a combined average annual dividend yield above 10% over the next decade. 

[Viking]

I have completed another update of my spreadsheet that captures Fairfax equity positions (attached below). I matched the individual positions to the three buckets Prem outlined in his annual letter to shareholders in the annual report (page 10) and updated the share ownership amounts. 

a.) mark to market

b.) associates: equity accounted

c.) consolidated equities

I also created a 4th bucket (other) to capture the FFH total return swaps, Blackberry debs and Atlas warrants. Does anyone know if these securities were perhaps captured in Prem's 'mark to market' bucket? There is $1 billion in bucket a.) that I cannot identify

I will add Farmers Edge and Boat Rocket after we get Q1 results; there is too much noise to try and bridge what they were valued at Dec 31 and where they are valued today. Prem did say during the annual meeting Q&A that their values were marked up post IPO (there was a gain booked for Fairfax).

Positions that are not disclosed or positions that are not traded on the stock exchanges (like other common stocks, limited partnerships, EXCO, Peak, KW Partnerships, AGT, other positions etc) are carried at last known value. This will understate values when markets are moving higher and the opposite when markets are moving lower. 

Please let me know if you see any errors or omissions (equity positions disclosed that I have missed).

The goal of the spreadsheet is to capture, as best as possible, what is going on in real time to Fairfax's equity holdings. It is not meant to be exact; rather a rough approximation of what we can expect each quarter from Fairfax and their equity holdings when they report results.  

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

The key take away for me with the added disclosure from the AR is how large the market value  of their various equity positions is: +$9 billion at Dec 31 and +$10 billion at March 31. It is also very diversified by business type and geography. 

It is also informative to look at the key changes in the equity portfolio over the past 2, 3 and 4 years (not in my spreadsheet). My key take away is the overall quality of the portfolio looks like it is improving. This is due to a couple of different things:

1.) problem companies are slowly being dealt with. Two recent examples: APR Energy (sold to Atlas), Fairfax Africa merged with Helios.

2.) largest recent acquisitions are performing very well: Atlas/Seaspan and Stelco

3.) portfolio managed by new blood (W Burton and L Chin) is performing very well. (Will be increased from $1.5 billion to $3.) 

4.) companies are taking advantage of current hot IPO market: Farmers Edge & Boat Rocker. In the works (via Fairfax India): Seven Islands, Sanmar and Anchorage.

5.) strength in cyclicals is benefiting Fairfax. Resolute and Stelco are the two best examples here. Eurobank is also starting to move higher.

6.) strength in emerging markets is benefitting Fairfax. Their significant holdings in Indian equities has done very well and looks well positioned moving forward.

Should the equity holdings continue to move higher in Q2 it will be interesting to see if Fairfax starts to monetize some of the positions that have increased significantly over the previous 9 months. Perhaps it is too early to be thinking about this given the significant economic growth expected in the coming quarters as the world economies start to open up post covid.

Fairfax Equity Holdings Apr 1 2021.xlsx

Edited April 19, 2021 by Viking

[petec]

There does seem to be an EXCO listing with the ticker EXCE. I’m not quite sure what it represents, nor what the share count is.

[petec]

There is some debate on the q1 prelim thread about whether Fairfax should sell RFP at these levels. 
 

I don’t know RFP as well as I know Stelco, but Stelco’s share price rise YTD (and since Fairfax bought it) is far less than the free cash flow Stelco will generate this year. 
 

In other words, assuming a special divi, the *franchise* is actually cheaper than it was before. 
 

I don’t have numbers for RFP but directionally the same logic applies. 

[StubbleJumper]

9 hours ago, petec said:

There is some debate on the q1 prelim thread about whether Fairfax should sell RFP at these levels. 
 

I don’t know RFP as well as I know Stelco, but Stelco’s share price rise YTD (and since Fairfax bought it) is far less than the free cash flow Stelco will generate this year. 
 

In other words, assuming a special divi, the *franchise* is actually cheaper than it was before. 
 

I don’t have numbers for RFP but directionally the same logic applies. 

 

So, that tells you that there is either a market pricing inefficiency, or that the market believes that only a fraction of the FCF that will be generated this year will end up in shareholders' pockets and the other fraction will be retained and end up being a deadweight loss (ie, ultimately capital destruction).  With Abitibi, we've seen plenty of capital destruction in the past.

 

SJ

[Viking]

Or the market does not believe prices will stay high for long enough to warrant a higher valuation. Is this a regular cycle (like a couple years ago) or a super cycle (much higher prices last years) or something in between. 

Stelco’s near term ‘issue’ is the hedge they took out in Q4; it will lower their profitability in Q1. But come Q2 they should be off to the races and profitability should spike (should prices remain at current levels).

Resolute’s business is pretty diversified (lumber, pulp, paper, newsprint). Lumber prices are crazy; not sure about everything else.

[StubbleJumper]

In case others have not already seen it, the following is a Bloomberg article about what is currently happening in the US lumber market:

 

https://www.bloomberg.com/news/articles/2021-04-20/lumber-s-version-of-a-crack-spread-is-exploding-from-cheap-trees

 

SJ

[petec]

2 hours ago, StubbleJumper said:

 

So, that tells you that there is either a market pricing inefficiency, or that the market believes that only a fraction of the FCF that will be generated this year will end up in shareholders' pockets and the other fraction will be retained and end up being a deadweight loss (ie, ultimately capital destruction).  With Abitibi, we've seen plenty of capital destruction in the past.

 

SJ

Actually I suspect what it tells you is that the market is slowly catching up to how good this year is going to be, but hasn’t got there yet, and is also smart enough not to rerate the franchise for a short term phenomenon. Either way the point stands: the franchises haven’t rerated so the higher price isn’t necessarily a reason to sell. 

[Xerxes]

What I want to know some years in the future is the back story behind this self-Total Return Swaps, which was put in place back in Q4 2020 and made public in Q1 2021.

Clearly, someone(s) took the other side of the trade at the moment in Q4 2020 not knowing it was Fairfax sitting on the other side. Could it have been the short-sellers from a decade ago, eager to pounce, that took the other side on a name they know well.

I guess it is not like there was a shortage of bears on the stock. But there is a difference between a bear and a bear that actually puts a trade on. The former is black bear while the latter is a grizzly bear.

So who is the grizzly bear and how many ? ... or is it just market-makers, but then again my understanding is that market-makers are in the business of making markets and not keeping risks. So, if other side of the trade were all market-makers, than they probably hedge their exposure by buying Fairfax stock directly at the same time, thus contributing to its raise.

[TwoCitiesCapital]

22 hours ago, Xerxes said:

What I want to know some years in the future is the back story behind this self-Total Return Swaps, which was put in place back in Q4 2020 and made public in Q1 2021.

Clearly, someone(s) took the other side of the trade at the moment in Q4 2020 not knowing it was Fairfax sitting on the other side. Could it have been the short-sellers from a decade ago, eager to pounce, that took the other side on a name they know well.

I guess it is not like there was a shortage of bears on the stock. But there is a difference between a bear and a bear that actually puts a trade on. The former is black bear while the latter is a grizzly bear.

So who is the grizzly bear and how many ? ... or is it just market-makers, but then again my understanding is that market-makers are in the business of making markets and not keeping risks. So, if other side of the trade were all market-makers, than they probably hedge their exposure by buying Fairfax stock directly at the same time, thus contributing to its raise.

Probably the latter. This would have been OTC type swap and it unlikely anybody in the market was looking to specifically short FFH at the same time FFH was looking to buy their own shares. 

They probably entered into an arrangement with a market maker. The market maker would hold the position, get paid a small spread + LIBOR to do so, and then would hedge the position by buying shares as you alluded to. No risk for them unless if FFH defaults, which is a minimal risk with either monthly/quarterly P&L settlements and they collect a floating LIBOR+spread for accepting that credit risk. 

Edited April 29, 2021 by TwoCitiesCapital

[StubbleJumper]

For forum members who do not read Canadian newspapers (or for Canadians who do not read the "Notional Pest"),  the following is an article about Resolute's financial results and the forest industry's prospects:

 

https://nationalpost.com/commodities/agriculture/sawmills-are-selling-boards-faster-than-they-can-cut-them/wcm/1f8a8c0e-d0c4-4610-8985-0cb51e33e16c

 

SJ

[Xerxes]

23 hours ago, TwoCitiesCapital said:

Probably the latter. This would have been OTC type swap and it unlikely anybody in the market was looking to specifically short FFH at the same time FFH was looking to buy their own shares. 

They probably entered into an arrangement with a market maker. The market maker would hold the position, get paid a small spread + LIBOR to do so, and then would hedge the position by buying shares as you alluded to. No risk for them unless if FFH defaults, which is a minimal risk with either monthly/quarterly P&L settlements and they collect a floating LIBOR+spread for accepting that credit risk. 

Thanks.

One could say that Prem used the Reddit-GameStop recipe (buy-calls(derivative)-en-masse-force-market-makers-buy-shares-to-hedge-and the virtuous circle) a full quarter before GameStop made it popular. Not saying that it is the market makers that have pushed the price up but probably contributed to as the spring unloaded itself from a low base.

Must give the man credit.

[Daphne]

To clarify re lumber pricing.  Is it priced when the order is booked or at the point in time when the shipment leaves the yard?

[Xerxes]

Farmer's Edge down a lofty 17% in 1 day.

Thank god it is not marked-to-market

[petec]

$100m investment into Foran Mining alongside Pierre Lassonde: fom_nr_-_fairfax_strategic_investment_-_final_may_25-_2021.pdf (foranmining.com)

[FairFacts]

Don't look now, BB up 11%

[Xerxes]

8 hours ago, petec said:

$100m investment into Foran Mining alongside Pierre Lassonde: fom_nr_-_fairfax_strategic_investment_-_final_may_25-_2021.pdf (foranmining.com)

It got a mention on Bloomberg this morning in the latter portion of this interview.

Use Commodities to Monetize Inflation, Says Wincrest's Bernard - Bloomberg

[StubbleJumper]

17 minutes ago, FairFacts said:

Don't look now, BB up 11%

Maybe lightning will strike twice?

[Xerxes]

6 minutes ago, StubbleJumper said:

Maybe lightning will strike twice?

It did ,,, last week.

It is called Ford F-150.

[matthew2129]

WSB getting back on board the BB hype train. FFH might have a second bite at the apple at unloading this pos above $15 w/ no selling restrictions this time around

[StubbleJumper]

12 minutes ago, matthew2129 said:

WSB getting back on board the BB hype train. FFH might have a second bite at the apple at unloading this pos above $15 w/ no selling restrictions this time around

Above $15?  I'd be deliriously happy if they were able to unload the equity position for US$12/sh, even if they elect to continue to hold the debentures.  Cripes, I wouldn't even be upset if they realized an average of US$10/sh.

Prem provided a valid excuse for not divesting that position during February, but it will be interesting to see what happens if the BB share price continues to rise as we work our way through the month of June.  Will he act, or will it just be more excuses?

 

SJ

[bearprowler6]

It might be worthwhile to check in on how the two IPOs (Farmers Edge and Boat Rocker) completed in March are doing:

Farmers Edge (IPO completed on March 3/21)

IPO priced at $17/share and close yesterday at $9.69/share. Approx decrease in value of Fairfax's investment is $180 million since the IPO.

Boat Rocker (IPO completed on March 24/21)

IPO priced at $9/share and closed yesterday at $7/share. Approx decrease in value of Fairfax's investment is $50 million since the IPO.

Prem and the entire team team  are to be applauded for taking advantage of the hot IPO market in bringing these two companies to the public markets.  Nonetheless I fear that Fairfax is now stuck with another two public market holdings that will be at best dead money for years with no chance of returning cash to Fairfax or their other shareholders in any reasonable period of time because if history is any guide Fairfax will feel compelled to continue to hold and support these entities over the "long run" and we all know what that means.

Edited May 28, 2021 by bearprowler6