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FFH to sell 8 million pfd shares at $25


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FAIRFAX ANNOUNCES PREFERRED SHARE ISSUE

 

Fairfax Financial Holdings Ltd. will issue in Canada eight million preferred shares, Series I, at a price of $25 per share, for total gross proceeds of $200-million, on a bought-deal basis to a syndicate of Canadian underwriters led by BMO Capital Markets, CIBC World Markets Inc., RBC Capital Markets and Scotia Capital Inc.

 

Holders of the Preferred Shares, Series I will be entitled to receive a cumulative quarterly fixed dividend yielding 5.0% annually for the initial five year period ending December 31, 2015. Thereafter, the dividend rate will be reset every five years at a rate equal to the then current 5-year Government of Canada bond yield plus 2.85%.

 

Holders of Preferred Shares, Series I will have the right, at their option, to convert their shares into Preferred Shares, Series J, subject to certain conditions, on December 31, 2015, and on December 31 every five years thereafter. Holders of the Preferred Shares, Series J will be entitled to receive cumulative quarterly floating dividends at a rate equal to the then current three-month Government of Canada Treasury Bill yield plus 2.85%.

 

Fairfax has granted the underwriters an option, exercisable in whole or in part at any time up to 9:00 am on the date that is two business days prior to the closing date, to purchase an additional 2 million Preferred Shares, Series I at the same offering price for additional gross proceeds of $50 million.

 

Fairfax intends to use the net proceeds of the offering to augment its cash position, to increase short term investments and marketable securities held at the holding company level, to retire outstanding debt and other corporate obligations from time to time, and for general corporate purposes. The offering is expected to close on or about October 5, 2010.

 

Fairfax intends to file a prospectus supplement to its short form base shelf prospectus dated September 25, 2009, in respect of this offering with the applicable Canadian securities regulatory authorities. Details of this offering will be set out in the prospectus supplement, which will be available on the SEDAR website for the Company at www.sedar.com.

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So per Bloomberg five year FFH debt trades at a 6.4% YTM maturity (when it trades which is a few times a month)...so 2.1% (5 yr canadian treas) + 2.85% seems cheap (even when tax effecting the dividend v. interest payments), especially since FFH has the option to let this remain outstanding.

 

My questions would be 1.) Why do they keep parceling this out rather than doing one big issue?, and 2.) if FFH thinks low rates are here to stay why not just issue prefs at 3month LIBOR (I don't know what the canadian equivalent is) plus a spread (which is what was just called away at ORH)... 

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A_hamilton, My guess:

 

1) There is a demand for the product.  FFH is just getting the money while its cheap.

2) No idea - probably keeping it simple. 

 

Issuing Series of preferreds is a common practice in Canada where the dividends are tax advantaged over interest for the buyer of the debt.

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I tend to agree with Al. The price of the preferreds is attractive to FFH, and Prem is just applying the old rule from the Canadian Football League -- if you run a play and it works, keep running the same play until the defense learns how to stop it.  I've seen teams run a sweep 5-6 times in the first quarter because it works for medium, easy gains. 

 

Issuing these preferreds in small amounts of $200m at a time strikes me as a very similar strategy....if it should no longer work, Prem will flip to a different page in the play book.  Keep it simple!

 

SJ

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Guest longinvestor

I have a feeling that they are issuing the preferreds to buy back the common.

 

I think so too. Prem has reason to like more concentrated, long term ownership, given their experience during 2002-06. All the moves made since 2006 indicate this bias. Taking subs private, delisting from NYSE, buybacks, preferred's etc.

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dont they still have the high yield Crum debt etc to get rid of?

 

 

 

I'd be a little surprised if the motive was to pay off existing debt.  The preferreds yield 5% after-tax.  The before tax equivalent would be roughly 5%/(1-taxrate), or roughly 7.5%.  That's more or less the same as the stated interest on most of FFH's existing debt.  In addition to that, some of that debt would likely have to be bought back at a premium, so that would be a net income hit in the current year.  IMO, the only debt that might be bought back would be ORH debt to permanently eliminate the need to do ORH financials.....however, I seem to recall that FFH has already found a work-around for that.

 

I'm guessing that Prem sees that the price of dry powder is stupidly-low, and the potential returns to being ready (liquid, with lots of equity) for an opportunity may be high, so might as well issue preferreds.  That opportunity might be another Zenith type of acquisition, or perhaps it'll be a buyback if the price of FFH shares should tumble for any reason.

 

I remember a time when FFH had little room to maneuver.  This is kind of nice to see the potential avenues that can now be taken!

 

SJ

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dont they still have the high yield Crum debt etc to get rid of?

 

 

 

I'd be a little surprised if the motive was to pay off existing debt.  The preferreds yield 5% after-tax.  The before tax equivalent would be roughly 5%/(1-taxrate), or roughly 7.5%.  That's more or less the same as the stated interest on most of FFH's existing debt.  In addition to that, some of that debt would likely have to be bought back at a premium, so that would be a net income hit in the current year.  IMO, the only debt that might be bought back would be ORH debt to permanently eliminate the need to do ORH financials.....however, I seem to recall that FFH has already found a work-around for that.

 

I'm guessing that Prem sees that the price of dry powder is stupidly-low, and the potential returns to being ready (liquid, with lots of equity) for an opportunity may be high, so might as well issue preferreds.  That opportunity might be another Zenith type of acquisition, or perhaps it'll be a buyback if the price of FFH shares should tumble for any reason.

 

I remember a time when FFH had little room to maneuver.  This is kind of nice to see the potential avenues that can now be taken!

 

SJ

 

Yep, part of the reason I invested with BRK and FFH at the beginning of the year was they both were drowning under cash. I like what I'm seeing sooo much cash! Opportunities arise in a period of post crisis, not in a bubble.

 

BeerBaron

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dont they still have the high yield Crum debt etc to get rid of?

 

 

 

I'd be a little surprised if the motive was to pay off existing debt.  The preferreds yield 5% after-tax.  The before tax equivalent would be roughly 5%/(1-taxrate), or roughly 7.5%.  That's more or less the same as the stated interest on most of FFH's existing debt.  

I believe there is some Crum at about 10%. Unless those got paid off in the last little while and I missed it but i do remember seeing that many times and it sticking in my head wishing they could refinance it.

Another possible reason for the financing though: can never have too much $ come hurricane season.

 

Just like you can never have too much pitching in baseball or D in Hockey!

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Long term debt consists of the following balances:

Fairfax unsecured notes:

7.75% due April 15, 2012(1) 180.6 178.1 181.6 177.4

8.25% due October 1, 2015(3) 90.9 90.6 90.9 90.6

7.75% due June 15, 2017(4) 282.6 266.1 282.6 263.9

7.375% due April 15, 2018(3) 144.2 143.7 144.2 143.7

7.50% due August 19, 2019 (Cdn$400.0)(1) 381.6 377.0 – –

8.30% due April 15, 2026(3) 91.8 91.3 91.8 91.3

7.75% due July 15, 2037(3) 91.3 90.1 91.3 89.9

Other debt – secured loan at 6.15% due January 28, 2009(1) – – 12.8 12.8

Long term debt – holding company borrowings 1,263.0 1,236.9 895.2 869.6

OdysseyRe unsecured senior notes:

7.65% due November 1, 2013(5) 225.0 224.0 225.0 223.7

6.875% due May 1, 2015(6) 125.0 123.8 125.0 123.6

Series A, floating rate due March 15, 2021(7) 50.0 49.7 50.0 49.7

Series B, floating rate due March 15, 2016(7) 50.0 49.7 50.0 49.7

Series C, floating rate due December 15, 2021(8) 40.0 39.8 40.0 39.8

Crum & Forster unsecured senior notes:

7.75% due May 1, 2017(9) 330.0 307.5 330.0 305.2

Advent subordinated notes:

floating rate due June 3, 2035(2) 34.0 33.0 34.0 32.9

s12.0 million, floating rate due June 3, 2035(2) 17.2 16.8 16.7 16.2

Advent unsecured senior notes:

floating rate due January 15, 2026(2) 26.0 25.0 26.0 25.0

floating rate due December 15, 2026(2) 20.0 19.4 20.0 19.3

Ridley economic development loan at 1% due August 10,

2019(2) 0.7 0.6 0.8 0.7

MFXchange, equipment loans at 7.3% due April 1, 2011 2.0 2.0 3.3 3.3

Long term debt – subsidiary company borrowings 919.9 891.3 920.8 889.1

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I have a feeling that they are issuing the preferreds to buy back the common.

 

That would be nice - I want to see the share count go lower. More likely Prem is raising cash for possible opportunities over the next few months, especially if there is a major sell-off!

 

cheers

Zorro

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I have a feeling that they are issuing the preferreds to buy back the common.

 

That would be nice - I want to see the share count go lower. More likely Prem is raising cash for possible opportunities over the next few months, especially if there is a major sell-off!

 

cheers

Zorro

 

Not to be overly difficult but why should we care about the share count.  It barely trades now.  As long as they keep a rock solid balance sheet there is not chance of any short attack again.  I would really prefer that they use the proceeds to grow all the subs they have purchased or started in the last 3 years, and keep up with the value investing.  Far more lucrative than buying back stock at or above book.  I certainly dont want to see any large acquisitions.  The only reason Zenith was acceptable is because FFH knew it inside-out.  I live in fear of another TIG and I am thinking that the FFH people do as well. 

 

Much better to do it the way they are now - expand organically and control underwriting from the get go.

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Guest longinvestor

I have a feeling that they are issuing the preferreds to buy back the common.

I certainly dont want to see any large acquisitions.  The only reason Zenith was acceptable is because FFH knew it inside-out.  I live in fear of another TIG and I am thinking that the FFH people do as well. 

Much better to do it the way they are now - expand organically and control underwriting from the get go.

Surely they have learnt from the lean years. Organic growth focus in NA and entering whole new markets, Poland, India, Brazil and such. These are ground floor opportunities in a century of great growth opportunity in those markets. This was the message I took away from the ASM this year.

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