Fairfax 2026

[RichardGibbons]

42 minutes ago, Txvestor said:

But based on the last TRS experience. Would there be a counterparty this time?

 

I think a counterparty can hedge for a guaranteed profit (as long as Fairfax remains solvent)? Because of that, I think the answer is almost certainly "yes".

[Maverick47]

1 hour ago, Txvestor said:

But based on the last TRS experience. Would there be a counterparty this time?

I wonder the same thing about the possibility of issuing shares well above book value, and then buying them back at less of a premium to book value later, as Singleton did many times with Teledyne.

 

I would never quarrel with the wisdom of such a transaction from the perspective of one who intends to hold Fairfax shares for the long term, but from the standpoint of the “other parties” to these sorts of transactions, the idea of “Fool me once, shame on you, fool me twice, shame on me” comes to mind.  
 

I’m still struggling with understanding the motivation of the counterparties to the current TRS.  Is it as simple as finding financial institutions that wanted fixed or floating income instruments and the Fairfax side of the swap promised them a risk margin above the sort of interest rates they would otherwise be able to obtain at the time the swap was entered into?

 

So they used the funds they wanted to invest in fixed income, and used them to buy Fairfax common stock instead, entering into the TRS agreement with Fairfax for them?

 

 

[djokovic1]

2 hours ago, Maverick47 said:

I’m still struggling with understanding the motivation of the counterparties to the current TRS

The bank is essentially renting out leveraged economic exposure to FFH shares to Fairfax. It earns the floating rate on the notional (its “spread” above its own cost of funds is its profit), while being neutral on the share price because it hedges by holding the physical shares. The bank takes on counterparty credit risk against Fairfax (mitigated by collateral) and liquidity/execution risk in managing the hedge, but has no directional view on FFH’s stock price.

[djokovic1]

On 7/9/2026 at 2:58 PM, SafetyinNumbers said:

It’s still supply and demand

Can you use that framework to estimate what Fairfax’s multiple will be in five years?

[dartmonkey]

7 hours ago, Txvestor said:

But based on the last TRS experience. Would there be a counterparty this time?

I think there will always be a counterparty happy to do this trade with Fairfax. They  buy the equivalent number of shares, and bill Fairfax every quarter based on how the shares have done.  There’s no risk involved, since if the shares go up, they pay Fairfax the amount of the gain but they will have made the exact same amount on the shares they hold (presumably with no taxes, since they have offsetting losses on the TRS.) And inversely if the shares are down, they’ll have lost on the shares but they’ll have won an equal amount on the TRS.

 

Then whenever Fairfax wants to end the arrangement, they sell the shares (probably but not necessarily to Fairfax) and pay out or take in whatever amount makes them break even, while keeping the small fees they’ll have earned every quarter. What’s not to like? I would think other banks would be jealous of whomever gets to do this deal. 

 

[I should have read to the end of the thread, this is all well explained by RichardGibbons and Djokovic.]

Edited 8 hours ago by dartmonkey

[73 Reds]

10 minutes ago, dartmonkey said:

I think there will always be a counterparty happy to do this trade with Fairfax. They  buy the equivalent number of shares, and bill Fairfax every quarter based on how the shares have done.  There’s no risk involved, since if the shares go up, they pay Fairfax the amount of the gain but they will have made the exact same amount on the shares they hold (presumably with no taxes, since they have offsetting losses on the TRS.) And inversely if the shares are down, they’ll have lost on the shares but they’ll have won an equal amount on the TRS.

 

Then whenever Fairfax wants to end the arrangement, they sell the shares (probably but not necessarily to Fairfax) and pay out or take in whatever amount makes them break even, while keeping the small fees they’ll have earned every quarter. What’s not to like? I would think other banks would be jealous of whomever gets to do this deal. 

Please excuse the dumb question but if the counterparty owns an equivalent number of shares as its TRS exposure, how does it make money?  Does it collect a "vig" either way?

Edited 8 hours ago by 73 Reds
missed line

[SafetyinNumbers]

16 minutes ago, 73 Reds said:

Please excuse the dumb question but if the counterparty owns an equivalent number of shares as its TRS exposure, how does it make money?  Does it collect a "vig" either way?

They charge interest on the outstanding amount. My guess is FFH did the TRS in CAD given it’s with Canadian banks so are probably paying under 3% for the exposure. It’s just a form of leverage. 

[dartmonkey]

18 minutes ago, 73 Reds said:

Please excuse the dumb question but if the counterparty owns an equivalent number of shares as its TRS exposure, how does it make money?  Does it collect a "vig" either way?

Gemini:

 

fairfax trs arrangement

 

If you are referring to the corporate financial structure, Fairfax Financial Holdings Limited (TSX: FFH) has historically utilized Total Return Swap (TRS) arrangements to manage its stock portfolio, hedge risk, and execute share buybacks. [1, 2, 3]

Fairfax's corporate TRS arrangements operate through the following mechanisms:

 

How Fairfax’s Stock TRS Arrangements Work

1. The Structure: Fairfax enters into derivative contracts with institutional counterparties who purchase Fairfax subordinate voting shares on the open market. [1, 2, 3]
2. The Economics: Instead of physically purchasing all the shares itself (which requires massive upfront cash), Fairfax agrees to pay the counterparty a floating interest rate (e.g., SOFR plus a spread). In return, the counterparty passes all total returns (dividend payments and capital appreciation) back to Fairfax. [1, 2]
3. Cash Preservation: Prem Watsa (Fairfax's CEO) uses these arrangements to gain the economic exposure of owning its own shares without heavily depleting the company's cash reserves at the holding level. If the share price drops, Fairfax must pay the counterparty for the loss; if the share price rises, the counterparty credits the gains to Fairfax. [1, 2]

[73 Reds]

3 minutes ago, SafetyinNumbers said:

They charge interest on the outstanding amount. My guess is FFH did the TRS in CAD given it’s with Canadian banks so are probably paying under 3% for the exposure. It’s just a form of leverage. 

Got it.  Doesn't seem like a very high rate of return considering the counterparty has to own the stock to generate 3% interest plus whatever dividends it may receive. 

Edited 8 hours ago by 73 Reds
missed words

[SafetyinNumbers]

3 hours ago, djokovic1 said:

Can you use that framework to estimate what Fairfax’s multiple will be in five years?

Higher is my guess. I think it’s hard to go below 1.2x BV given how active FFH is buying back stock so we’re at the lower end. It might take a hard market to go beyond 1.5x unless some quant funds jump back on board over time as BVPS starts growing again. What’s interesting is the optionality on how high it can go. The theory is higher lows and higher highs on the multiple over time.

[SafetyinNumbers]

8 minutes ago, 73 Reds said:

Got it.  Doesn't seem like a very high rate of return considering the counterparty has to own the stock to generate 3% interest plus whatever dividends it may receive. 

They would owe the dividends to FFH on the TRS as well. It’s a lending business with almost no risk that probably gets the best capital treatment. It’s still good business once the leverage is factored in.

[73 Reds]

3 minutes ago, SafetyinNumbers said:

They would owe the dividends to FFH on the TRS as well. It’s a lending business with almost no risk that probably gets the best capital treatment. It’s still good business once the leverage is factored in.

Are you referring to leverage by the counterparty?  I thought the counterparty owned an equivalent number of shares as its exposure(?)  Sorry for the confusion but I never did understand the precise mechanics.

[SafetyinNumbers]

19 minutes ago, 73 Reds said:

Are you referring to leverage by the counterparty?  I thought the counterparty owned an equivalent number of shares as its exposure(?)  Sorry for the confusion but I never did understand the precise mechanics.

Yes, banks use leverage to earn an acceptable ROE on their own capital. The banks are also hedged so you are correct they likely own the equivalent number of shares or have other counterparties that want short exposure. 

[73 Reds]

1 hour ago, SafetyinNumbers said:

Yes, banks use leverage to earn an acceptable ROE on their own capital. The banks are also hedged so you are correct they likely own the equivalent number of shares or have other counterparties that want short exposure. 

Could you explain how the counterparty uses leverage in a TRS for us "slow leaners"?  I'm still not getting it,  Do they have more exposure than the shares they own?

[SafetyinNumbers]

50 minutes ago, 73 Reds said:

Could you explain how the counterparty uses leverage in a TRS for us "slow leaners"?  I'm still not getting it,  Do they have more exposure than the shares they own?

It’s more about understanding how a bank makes money. They have a capital base and then lend multiples of the capital base. That’s the leverage I’m referring to. It has nothing to do with TRS per se which are fully hedged. They only make money on the difference between the rate they lend at and the rate they borrow at.

[KPO]

5 hours ago, dartmonkey said:

How Fairfax’s Stock TRS Arrangements Work

1. The Structure: Fairfax enters into derivative contracts with institutional counterparties who purchase Fairfax subordinate voting shares on the open market.

How does the counterparty exit their position without putting significant downward pressure on the stock when the TRS is unwound and if Fairfax decides not to purchase the shares?

[SafetyinNumbers]

1 hour ago, KPO said:

How does the counterparty exit their position without putting significant downward pressure on the stock when the TRS is unwound and if Fairfax decides not to purchase the shares?

My guess is that if FFH wants to exit without buying the block it will be based on some sort of VWAP so it’s not done all at once and the bank is never at risk. You are correct that those shares would have to be absorbed by the market.