Fairfax 2021

[glider3834]

33 minutes ago, StubbleJumper said:

 

I have attached the issuer bid circular for Home Capital Group, which came out with their SIB announcement a few days before Fairfax.  Go down to page 32 and read the tax treatment, both domestic and foreign.  The numbers will be different for Fairfax, but the tax law should be roughly the same.

 

***EDIT*** The Home Capital SIB has an odd-lot privilege, so there's some easy beer money to be made by a Canadian taxpayer who has enough space in his RRSP to buy 99 shares...

 

 

SJ

homecapital.pdf 725.19 kB · 0 downloads

ok thanks SJ I will take a look

 

I guess Fairfax can also continue their NCIB (at market) to mop up shares that don't get tendered via SIB 

Edited November 17, 2021 by glider3834

[value_hunter]

I wonder is this whole setup just to exit their TRS bet. The size of TRS 1,964,155 share is roughly around $1B if the price is around $500 per share. So if they close the TRS bet after the auction, they pretty much locked in the buyback price at $372.

[glider3834]

9 hours ago, glider3834 said:

Wow massive news 

 

Odyssey's carrying value which was 3.9 bil at 31 Dec-20  - they haven't reported 30 Sep-21 carrying value but lets assume around 17.5% increase in Fairfax's book value then its probably sitting around the 4.5 bil area - so sale price is around 2 x book value at 9 bil valuation by my estimate

 

 

I need to correct this post - Odyssey's book value at 31 Dec-20 was 4.8bil using stand alone US GAAP (see below) - so it looks like this transaction was probably more in the 1.6x BV area (estimate Odyssey Group 30 Sep shareholder equity at 5.64 bil or 17.5% increase) . Anyway I am sure we will get more info on this transaction in due course.

 

Edited November 17, 2021 by glider3834

[matthew2129]

28 minutes ago, StubbleJumper said:

 

I have attached the issuer bid circular for Home Capital Group, which came out with their SIB announcement a few days before Fairfax.  Go down to page 32 and read the tax treatment, both domestic and foreign.  The numbers will be different for Fairfax, but the tax law should be roughly the same.

 

***EDIT*** The Home Capital SIB has an odd-lot privilege, so there's some easy beer money to be made by a Canadian taxpayer who has enough space in his RRSP to buy 99 shares...

 

 

SJ

homecapital.pdf 725.19 kB · 6 downloads

Thank you! Based on page 38 of the PDF, it looks like US shareholders would only be subject to a long-term capital gains tax for any profit  above their cost-basis

Edited November 17, 2021 by matthew2129

[StubbleJumper]

16 minutes ago, matthew2129 said:

Thank you! Based on page 38 of the PDF, it looks like US shareholders would only be subject to a long-term capital gains tax for any profit  above their cost-basis

 

Do not forget about the Canadian withholding tax....

 

***EDIT*** If the deemed dividend is US$300+ as I am guessing, the withholding tax would be US$45+/sh.

 

SJ

Edited November 17, 2021 by StubbleJumper

[matthew2129]

48 minutes ago, StubbleJumper said:

 

Do not forget about the Canadian withholding tax....

 

***EDIT*** If the deemed dividend is US$300+ as I am guessing, the withholding tax would be US$45+/sh.

 

SJ

For purposes of determining the "paid-up capital" basis , can FFH not cherry-pick the stock that was issued in connection with the Allied Word acquisition for US ~$470?

[StubbleJumper]

3 minutes ago, matthew2129 said:

For purposes of determining the "paid-up capital" basis , can FFH not cherry-pick the stock that was issued in connection with the Allied Word acquisition for US ~$470?

 

No, I don't believe that it can be marked to market.  I believe that it's the actual amount that the original shareholders paid for their shares.  The shares from 1986 were issued for peanuts, while the shares from 2015 were much higher.  So what will be the weighted average?  I'm guessing that it will be pretty low.  But I guess we'll see tomorrow or Friday when the filing becomes available.

 

SJ

[petec]

9 hours ago, StubbleJumper said:

 

 

Well, this will be interesting to see.  The TRS were described as a measure to lock-in a buyback price.  What was announced today *is* the buyback.  So, do they close out the TRS following the auction?  Or was it really the case that the TRS were intended for speculation in FFH's own shares, in which case we shouldn't expect to see the position closed?

 

 

SJ

 

Why is this the buyback rather than a buyback? Why would it make sense to close out the TRS before the stock reaches (whatever Prem thinks is) fair value?

 

Assuming fair value is above the $425-500 buyback range - and we know Prem thinks that it is - I think it makes sense to do the current buyback and hold the TRS to lock in a buyback at $373* later, when premium growth has stopped and the insurecos can dividend cash to the holdco.

 

*IIRC this is the initiation price of the TRS.

 

[KPO]

1 hour ago, value_hunter said:

I wonder is this whole setup just to exit their TRS bet. The size of TRS 1,964,155 share is roughly around $1B if the price is around $500 per share. So if they close the TRS bet after the auction, they pretty much locked in the buyback price at $372.

I had similar thoughts. At minimum it impacts the TRS value further inflating book at the end of the quarter (if these gains hold post 12/23). On a separate note, what was the remaining amount on their repurchase authorization? If this wasn’t exhausted then why announce this until they closed it out at much lower recent prices?  

[StubbleJumper]

2 minutes ago, petec said:

 

Why is this the buyback rather than a buyback? Why would it make sense to close out the TRS before the stock reaches (whatever Prem thinks is) fair value?

 

Assuming fair value is above the $425-500 buyback range - and we know Prem thinks that it is - I think it makes sense to do the current buyback and hold the TRS to lock in a buyback at $373* later, when premium growth has stopped and the insurecos can dividend cash to the holdco.

 

*IIRC this is the initiation price of the TRS.

 

 

 

That's a solid argument.  But, where does it take you?  In my view, it takes you to the viewpoint that FFH did not undertake the TRS for the purpose that was originally stated, which was to lock in an attractive re-purchase price.  It takes you to the view that FFH instead opportunistically speculated on the price of its own shares.

 

Is that the type of risk management you want to see from an insurance company?  Given the industry's history of occasionally seeing a company enter a death-spiral (FFH may have narrowly avoided that 20 years ago), do you want to see a management team exposing the company cash flow risk from TRS compounded on top of whatever other events in the insurance industry or financial markets that trigger a reduction in the company's share price?  It's just one more way of taking on a great deal of additional leverage (which can work for you or it can work against you).

 

I would say that if FFH's intention was to speculate on its own share price, we should be a little uncomfortable.  It's even worse than the macro speculation of 5 years ago.  I guess the only saving grace is that the position size is not as ridiculous as some of the past debacles.

 

 

SJ

[petec]

24 minutes ago, StubbleJumper said:

That's a solid argument.  But, where does it take you?  In my view, it takes you to the viewpoint that FFH did not undertake the TRS for the purpose that was originally stated, which was to lock in an attractive re-purchase price.  It takes you to the view that FFH instead opportunistically speculated on the price of its own shares.

I don’t really understand why the TRS is not a speculation if it is used to lock in the price for this buyback, but is a speculation if it is used to lock in the price for another buyback in the future. 

[StubbleJumper]

Just now, petec said:

I don’t really understand why the TRS is not a speculation if it is used to lock in the price for this buyback, but is a speculation if it is used to lock in the price for another buyback in the future. 

 

Because at a certain point, you have exceeded any reasonable financial capacity that might be available to actually conduct a buy back.  So, in this case FFH seems to be levering up by "borrowing" some money from OMERS to fund the SIB.  Once they've levered up a billion through this transaction, they are even tighter on financial capacity to conduct future buybacks.  If you cannot foresee in the reasonably near future enough financial capacity to actually conduct a buyback, what are you actually doing?

 

 

SJ

[ERICOPOLY]

I'm surprised that one is allowed to do the following:  enter a TRS and then cash out shareholders with a buyback at a price significantly above market and closing out the TRS to recoup the premium paid for the shares.

 

It just seems like a way for the company and shareholders to screw over the  counter-party to the TRS.

[petec]

4 minutes ago, StubbleJumper said:

 

Because at a certain point, you have exceeded any reasonable financial capacity that might be available to actually conduct a buy back.  So, in this case FFH seems to be levering up by "borrowing" some money from OMERS to fund the SIB.  Once they've levered up a billion through this transaction, they are even tighter on financial capacity to conduct future buybacks.  If you cannot foresee in the reasonably near future enough financial capacity to actually conduct a buyback, what are you actually doing?

 

 

SJ

Well technically at this valuation they could sell all of Odyssey and buy back 70% of Fairfax, so I’m not sure this transaction is evidence that they’re tapping out their capacity - in fact the opposite. 
 

More pertinently, we are currently in a hard market, growing premia at 24%, and absorbing capital to do so. It’s reasonable to assume that at some point the market will soften and the insurance subsidiaries will generate capital. So it’s reasonable to assume that buyback capacity will increase in the future. 
 

I don’t see any logic behind saying that the TRS has to be applied to *this* buyback, or it’s a speculation. 

[petec]

2 minutes ago, ERICOPOLY said:

I'm surprised that one is allowed to do the following:  enter a TRS and then cash out shareholders with a buyback at a price significantly above market and closing out the TRS to recoup the premium paid for the shares.

 

It just seems like a way for the company and shareholders to screw over the  counter-party to the TRS.

It does seem odd. 

[StubbleJumper]

2 minutes ago, ERICOPOLY said:

I'm surprised that one is allowed to do the following:  enter a TRS and then cash out shareholders with a buyback at a price significantly above market and closing out the TRS to recoup the premium paid for the shares.

 

It just seems like a way for the company and shareholders to screw over the  counter-party to the TRS.

 

Yeah, when FFH announced it entered into a TRS on their own shares, I was quite surprised that it was even possible to do so from a regulatory perspective.

 

 

SJ

[ERICOPOLY]

It is self-dealing isn't it?

[ERICOPOLY]

Imagine if the buyback price were $1,000.  Then they close out the TRS and completely screw the counter-party.

 

Makes me think they won't close out the TRS.  

[matthew2129]

1 minute ago, ERICOPOLY said:

Imagine if the buyback price were $1,000.  Then they close out the TRS and completely screw the counter-party.

 

Makes me think they won't close out the TRS.  

Though the counterparty is almost certainly just some bank that turned around and purchased an equivalent amount of shares in the open market, and is just in the TRS to earn LIBOR + margin  fee from FFH

[ERICOPOLY]

1 minute ago, matthew2129 said:

Though the counterparty is almost certainly just some bank that turned around and purchased an equivalent amount of shares in the open market, and is just in the TRS to earn LIBOR + margin  fee from FFH

 

That's a lot of shares to turn around and buy without moving the price.  I dunno.

[matthew2129]

Just now, ERICOPOLY said:

 

That's a lot of shares to turn around and buy without moving the price.  I dunno.

If you look back at the trading/volume data from the same time that FFH put on the TRS you will see a huge spike in volume and stock price

[ERICOPOLY]

Just now, matthew2129 said:

If you look back at the trading/volume data from the same time that FFH put on the TRS you will see a huge spike in volume and stock price

 

I don't know how these contracts are put together.  Is there an accumulation period where as the bank buys shares the downside is accepted by FFH and all rolled into one averaged price by the time the accumulation period ends with a pre-negotiated total dollar amount of shares?

 

 

[Cigarbutt]

^Imagine a buyout offer or a going-private transaction with a premium, where the premium results in an equivalent amount of net earnings of the 'target'.

FFH will also get the benefit of the Jan dividend on their TRS shares.

This is not intrinsically 'wrong' but the quirkiness reminds me of a time when the 'net value' of challenged entities went up as a result of their debt liabilities being marked-to-market down.

 

[matthew2129]

8 minutes ago, ERICOPOLY said:

 

I don't know how these contracts are put together.  Is there an accumulation period where as the bank buys shares the downside is accepted by FFH and all rolled into one averaged price by the time the accumulation period ends with a pre-negotiated total dollar amount of shares?

 

 

I suppose the structure could vary, but i think typically the opening reference price and ongoing margin is offered by the bank upfront, and its up to the bank's trading desk to determine the appropriate price based on the size of the TRS and the liquidity of the underlying stock

[glider3834]

5 hours ago, StubbleJumper said:

do you want to see a management team exposing the company cash flow risk from TRS compounded on top of whatever other events in the insurance industry or financial markets that trigger a reduction in the company's share price? 

SJ I think thats one reason why they wanted to keep $1.5 bil in holdco & 2 bil revolver undrawn - with the TRS it is around 2mil shares &  733 mil or so exposure  - given their existing liquidity & other potential options to raise further liquidity- cash flow risk is well covered IMO with downside risk low given strike price -  its a calculated risk but I wouldn't put it in the same category as their macro bet.

 

long equity total return swaps on 1,964,155 Fairfax subordinate voting shares with an original notional amount of $732.5 million (Cdn$935.0 million) or approximately $372.96 (Cdn$476.03) per share.

Edited November 18, 2021 by glider3834