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Chou Funds 2011 Annual Report


Parsad
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It looks that at least a few (Berkowitz, Chou) read the fine print. It may be time to discuss it in the blog.

 

Bank TARP warrants are complex, with terms and conditions that are unique to each bank. Thus we encourage you to research them for yourself and draw your own conclusions. The legalese is quite intimidating but there is some help on the way. Some banks have started to pay dividends that exceed a set price, and we are starting to see how anti-dilution clauses that were added to protect TARP warrant holders apply with regard to:

 

a) the adjustment of the strike price.

b) the number of shares you can purchase for each warrant you hold.

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b) the number of shares you can purchase for each warrant you hold.

 

I was reading the FFBCW prospectus the other day and noticed that it mentioned increase in warrant shares in the context of non-ordinary divs and share repurchases:

 

In the case of cash dividends or other distributions. If we fix a record date for making a distribution to all holders of our common stock of securities, evidences of indebtedness, assets, cash, rights or warrants (excluding ordinary cash dividends (as defined below), dividends of our common stock and other dividends or distributions referred to in the preceding bullet point), then the exercise price in effect prior to such record date will be reduced immediately thereafter to the price determined by multiplying the exercise price in effect immediately prior to the reduction by the quotient of (x) the market price (as defined below) of our common stock on the last trading day preceding the first date on which our common stock trades regular way on the principal national securities exchange on which our common stock is listed or admitted to trading without the right to receive such distribution, minus the amount of cash and/or the fair market value of the securities, evidences of indebtedness, assets, rights or warrants to be so distributed in respect of one share of our common stock (such subtracted amount and/or fair market value, the “Per Share Fair Market Value”) divided by (y) such market price on the date specified in clause (x). Any such adjustment will be made successively whenever such a record date is fixed. The number of warrant shares will be increased to the number obtained by multiplying the number of warrant shares issuable upon exercise of a warrant immediately prior to such adjustment by the quotient of (a) the exercise price in effect immediately prior to the distribution giving rise to this adjustment divided by (b) the new exercise price as determined in accordance with the immediately preceding sentence. In the case of adjustment for a cash dividend that is, or is coincident with, a regular quarterly cash dividend, the Per Share Fair Market Value would be reduced only by the per share amount of the portion of the cash dividend that would constitute an ordinary cash dividend. If, after the declaration of any such record date, the related distribution is not made, the exercise price and the number of warrant shares then in effect will be readjusted, effective as of the date when our board of directors determines not to make such distribution, to the exercise price and the number of warrant shares that would then be in effect if such record date had not been fixed.

 

I re-read things like this 20 times and they are still so hard to follow, but if I read that correctly. In the case of FFBC, any non-ordinary divs, rights offerings etc... Would result in a reduction of exercise price in addition to an increase in the ratio of shares available for purchase per warrant.  There is similar wording in the section that covers “pro rata repurchase” of stock.

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Guest hellsten

Interesting to see that he has invested in QXM, a Chinese mobile phone manufacturer (GSM technology). I remember looking at XING, the parent company, in 2009 and deciding that it's not interesting. QXM looks more interesting:

- Net cash per share approximately $6.20

- Price $1.07

 

Prem and Francis seem to love mobile phone manufacturers (RIMM, NOK, QXM). Personally, I don't understand why. High-tech companies that depend on fickle consumers are risky, but maybe the price is right?

 

Chou's investment in Olympus Re Holdings looks like a small homerun. Anyone know the story of when and why Chou invested in Olympus Re Holdings? I assume this is the company with connections to White Mountains (Jack Byrne) and Leucadia.

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b) the number of shares you can purchase for each warrant you hold.

 

I was reading the FFBCW prospectus the other day and noticed that it mentioned increase in warrant shares in the context of non-ordinary divs and share repurchases:

 

In the case of cash dividends or other distributions. If we fix a record date for making a distribution to all holders of our common stock of securities, evidences ...

 

FFBCW already paid dividends and recently adjusted the strike, but not the warrant shares, because if the latter is under a certain decimal (I think 1/100th) then it accumulates until it is more than that. Point is you can see the formula in action.

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Guest Hester

Interesting to see that he has invested in QXM, a Chinese mobile phone manufacturer (GSM technology). I remember looking at XING, the parent company, in 2009 and deciding that it's not interesting. QXM looks more interesting:

- Net cash per share approximately $6.20

- Price $1.07

 

Prem and Francis seem to love mobile phone manufacturers (RIMM, NOK, QXM). Personally, I don't understand why. High-tech companies that depend on fickle consumers are risky, but maybe the price is right?

 

Chou's investment in Olympus Re Holdings looks like a small homerun. Anyone know the story of when and why Chou invested in Olympus Re Holdings? I assume this is the company with connections to White Mountains (Jack Byrne) and Leucadia.

 

The risk of fraud is very high for QXM in my opinion. See my comments on this this thread:

 

 

 

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/chou-funds-13-f-6250/msg69261/#msg69261

The Chairman of the board of QXM (Qiao Xing Mobile) is Zhi Yang Wu. His father, Mr. Rui Lin Wu, is the vice chairman.

 

Mr. Wu, the father, also founded XING, which is the majority owner of QXM (owns 60%). Currently he is the Chairman and CEO of XING. XING tried for a very long time to buyout QXM, unsuccessfully.

 

XING, Qiao Xing Universal Resources is the name, was founded in 1992 and went public in '99. It was named Qiao Xing Universal Telephone Inc until January 2010, when it changed it's name after they acquired a copper-molybdenum mining company from one of Mr. Wu's private fully owned and controlled companies. Mr. Wu, with no previous mining experience, bought 3 mines in the late 2000's through his private companies and sold all of them off in a few years, including the one to XING. Since the transaction XING's stock has lost over 70%.

 

With this new focus on mining he founded Real Gold Mining, a gold producer listed in the Hong Kong markets. He remains the controlling shareholder to this day, although he has no position in the managing of Real Gold. Real Gold IPO'd in 2009. They have averaged one CEO resignation per year.

 

In May 2011, it was discovered that Mr. Wu inappropriately pledged all of Real Gold's assets as collateral for a personal loan for some of his wholly owned private companies. Although he wasn't a director or manager of Real Gold, he was/is the majority shareholder and at the time he was also a director, actually the sole director, of one of Real Gold's wholly owned subsidiaries, Lita Investments. Wu arranged a 240 million yuan (US$37 million) borrowing facility with Shanghai Pudong Development Bank for four private companies that are part of his Cosun telecommunications-to-mining private conglomerate. Wu signed a similar pledge with the bank for a 100 million yuan borrowing facility in September 2009. Real Gold's management say they had no knowledge that Wu was doing this at the time.

 

Real Gold stock has been halted since May of last year. http://finance.yahoo.com/echarts?s=0246.HK+Interactive#symbol=0246.hk;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

 

In October, Real Gold's auditor, Delloitte, resigned citing the company's inability to disclose some material information. In August, Real Gold's independant director who was leading the internal investigation resigned over disagreements with the board. http://www.businessweek.com/news/2011-10-13/real-gold-mining-says-deloitte-resigns-as-auditor-over-omissions.html

 

Here's a link to the Real Gold/Wu story. http://chinaminingblog.com/2011/06/real-gold-assets-used-to-secure-directors-personal-loan/

 

Wu has had other shady insider dealings between his private companies and publicly listed stocks, including a company named Prod-ART, Ankson, and SEEC Media Group that I'll omit for brevity.

 

 

I wish Mr. Chou and his fund's investors the best of luck in their partnership with QXM's majority shareholder, the Wu's and XING. Hopefully it turns out better for Chou than it did for the minority shareholders in Wu's other public companies.

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Mr B, what are your plans with that document? I offer a small audience.

Well, you did contribute; let's not forget that.

No plans, just part of the annual letter. What exactly do you mean? Email me if necessary.

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As I say in the intro,I am not the author. Kudos to the author.

 

PlanMaestro wrote in his worldpress-blog about the 2nd (hidden) warrant thesis discussed in this thread.

 

TARP warrants: let every eye negotiate for itself and trust no agent

by PlanMaestro

2012-04-01

 

http://variantperceptions.wordpress.com/2012/04/01/tarp-warrants-let-every-eye-negotiate-for-itself/

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plan/mrb,

 

i am reading the adjustment clauses on pages S-28/29 from the prospectus over and over again, can't figure out how to get from the wording in these clauses to the 43% increase in number of shares in the buffett example (700 million to 1 billion), it would be great if you could provide some kind of numerical example......

 

regards

rijk

 

http://www.sec.gov/Archives/edgar/data/70858/000119312510044940/d424b7.htm#tx70043_14

 

The warrent comes with a strike price of $7.14 and 700m warrent shares (6% of BAC outstanding shares) and has the same anti-dilution adjustments as the TARP warrants. It is quite plausible for the warrent shares to increase from 700m to 1Bn AND the exercise price of $7.14 to be reduced to $5.00 over the 9 years to 2021. What can we say? The Master strikes, yet again!

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i am reading the adjustment clauses on pages S-28/29 from the prospectus over and over again, can't figure out how to get from the wording in these clauses to the 43% increase in number of shares in the buffett example (700 million to 1 billion), it would be great if you could provide some kind of numerical example......

 

http://www.sec.gov/Archives/edgar/data/70858/000119312510044940/d424b7.htm#tx70043_14

 

 

It's in the second bullet point. 

 

Set out all the variables.  Put some numbers to it, and you'll see the change in both exercise price and shares per warrant.  Remember that each adjustment is quarterly, so you get some excellent compounding on both.

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PlanMaestro wrote in his worldpress-blog about the 2nd (hidden) warrant thesis discussed in this thread.

 

TARP warrants: let every eye negotiate for itself and trust no agent

by PlanMaestro

2012-04-01

 

http://variantperceptions.wordpress.com/2012/04/01/tarp-warrants-let-every-eye-negotiate-for-itself/

 

Does anyone publish a comprehensive list of all TARP warrants that trade on public markets?

 

Would any of you hedgies out there know how many TARP warrants for smaller banks trade in secondary markets for accredited investors like secondmarket?

 

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Maybe he can delete it to keep the anonimity?

 

2010? Gretzky, skate, puck, MAYBE, going to be?

 

I've got a blind spot with options. With BAC warrants, I'm trying to get away from a habit of thinking categorically and more towards Ericopoly's review of payouts and implied leverage.

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It's in the second bullet point. 

 

Set out all the variables.  Put some numbers to it, and you'll see the change in both exercise price and shares per warrant.  Remember that each adjustment is quarterly, so you get some excellent compounding on both.

 

mrb/plan/merkhet,

 

ok, i have done what you suggested, and i can see that:

- the strike price gets reduced for dividend payments and

- the number of shares per warrant grows roughly at the dividend rate......

 

so, with the warrants expiring in 2019 (6 years of dividend form 2013 to 2018), that would roughly (applying annual compounding, quarterly would give slightly better results) indicate the following upside just from increases in number of shares:

3% div ->  19%

5% div ->  34%

 

my questions:

- what is the logic behind the number of shares adjustment?

- 3% div looks realistic, 5% looks aggressive, based on which assumptions do you get to 43%?

 

regards

rijk

 

 

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Does anyone publish a comprehensive list of all TARP warrants that trade on public markets?

 

Would any of you hedgies out there know how many TARP warrants for smaller banks trade in secondary markets for accredited investors like secondmarket?

 

I think the ones listed in the table of the attachment is a comprehensive list. Please let the board know if you find any other.

Another source http://www.caminuscapital.com/CaminusWeekly_12.pdf

 

It's in the second bullet point. 

 

Set out all the variables.  Put some numbers to it, and you'll see the change in both exercise price and shares per warrant.  Remember that each adjustment is quarterly, so you get some excellent compounding on both.

 

mrb/plan/merkhet,

 

ok, i have done what you suggested, and i can see that.......

There is a excel spreadsheet in the FFBC warrant thread you can use. I think you are referring to the Buffett' warrants? In that case they expire in 2021.

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it looks like the warrants provide cheap leverage + 2x dividend return relative to common shares...

 

i think the main question remains,... what is the rationale for having a number of shares adjustment on top of a strike price adjustment?

 

regards

rijk

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it looks like the warrants provide cheap leverage + 2x dividend return relative to common shares...

 

i think the main question remains,... what is the rationale for having a number of shares adjustment on top of a strike price adjustment?

 

regards

rijk

 

The rationale is that The US Treasury did not want bailed out banks to pay increased dividends or otherwise reduce their capital.  WEB wanted nothing less.

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