ffh Senior Notes offering

[Partner24]

Here is my 2 cents speculation about the 150 millions: it is for the 2012 debt. Extending the debt payment further. Increasing financial flexibility at opportunistic times.

 

But who really knows? Not me.

 

Time will tell.

 

 

[Smazz]

Ive seen this here a few times before.

The best and most cost effective time to raise capital is when you are doing great (as per now at FFH).

2012 is just around the corner in the financial world so its good to have it under the belt now.  You never know what may transpire in such a short amt of time in the P&C world.

 

A question for the gurus of this area:

Considering FFHs current strong financial state shouldnt they be getting a bit more favourable (for FFH) coupon rate for their debt now?

Just curious.

[Parsad]

Considering FFHs current strong financial state shouldnt they be getting a bit more favourable (for FFH) coupon rate for their debt now?

 

If they were refinancing in their current state three years ago...yes.  But credit markets have tightened in the last year.  So, even with a better balance sheet, Fairfax may not get a better rate as they are BBB-rated. 

 

Take a look at Berkshire Finance which issued some notes on July 7th.  The 2018's are paying 5.4%, and that's an AAA-rated company.  Don't let the rating agencies fool you.  In these credit markets, Berkshire is still seen as AAA-rated company.  Cheers! 

[StubbleJumper]

Nope, I don't buy the idea that the $150m is to refinance the 2012 debt....or any other maturing debt. 

 

FFH went to great pains to indicate that C&F had $1.3b in statutory surplus AFTER paying out a $100m divvy to FFH.  If you construct a rough premiums:surplus ratio, it would appear that C&F could send another dividend of perhaps $300m to FFH without remotely triggering any capital adequacy questions.  As I suggested earlier in this thread, a $500m divvy from ORH would still leave that sub overcapitalized...and it looks like there may still be some dividend room in NB too.

 

So at the end of Q2, the holdco had nearly $900m in cash...and collectively, the subs are so well capitalized that they could probably send another $900m in dividends.  What the hell do they need that $150m for?  Certainly not to repay a small debt that matures in 3 years.

 

Looking at their debt maturities, there are no meaningful chunks due anytime soon -- and FFH went to great pains to flag this too.  There is absolutely no need to borrow $150m for refinancing when you're already swimming in cash at the holdco and the subs are ridiculously overcapitalized. 

 

IMO, there really are only a couple of reasonable possibilities: an acquisition, or taking ORH private.

 

SJ

[woodstove]

What about ... stimulate underwriters to updated coverage, stock price increases, acquisition funded by stock issuance?

[Parsad]

Could be right Stubble.  I'm sure we'll find out the answer during the next conference call...if not sooner.  Cheers!

[T-bone1]

Let the debate rage on:

 

FFH just announced they are increasing the offering to C$400 Million in ten year debt (not sure if this means it will be C$ denominated).

 

"some of the proceeds will be used to retire debt"

 

Oportunistic, yes, but also looking more like ORH's days are numbered

[Guest Broxburnboy]

I guess they are raising more cash simply because they can... Apparently there are  opportunities out there in the bond market which are inflation protected and secure (hybrids). Sit back and collect the spread and hedge against inflation at the same time.

[valuecfa]

Well they have said numerous times that they are interested in a Chinese acquisition. I'm curious to know of what size they are a thinking of entering the mainland market at.  My guess is we will see a chinese acquisition announcement within the next quarter.

[returnonmycapital]

I would argue that a takeover of the remaining shares of ORH should be considerably more expensive than just a 25% premium to its recent market price.  If an insurance\reinsurance business enjoys cost-free float over the long-term and has every reasonable prospect of remaining as disciplined in the future, its true value should include float as part of shareholder's equity. In addition, if the investment of that float has been defensible and is expected to continue in a similar fashion, the business is worth at least the value of its investments.  Based on these notions, ORH's true value is more than $8 billion today.  That is more than twice its book value.  And before you berate me for such fanciful musings, that is the valuation metric used by BRK in its acquisition of GenRe, no?

 

That being the case, a slow takeover of ORH through repurchase of its own shares makes much greater sense. 

It also highlights to me just how undervalued ORH remains.

[Vinayd]

OK, for those who believe FFH will take ORH private imminently, this expansion to $400M (...from $150M) makes good sense.

 

FFH has $180M due 2012, and some more due in 2015.  

 

ORH has $225M due 2013 and another $125M due 2015.  

 

When I saw the original $150M, it strengthened the ORH privitization thesis, but it wasn't enough in my mind.  The $489M of ORH debt wil essentially become FFH's obligation when they take ORH private -- and it is this debt that is maturing sooner.  So, if FFH used the sub's surplus to fund the privitization it would leave ORH exposed to a lot of debt maturing in 3-5 years.  If ORH had a bad year-or-two, they might struggle to cover the debt or be required to extend at even higher rates.  

 

So, this $400M should be enough to pay off the $150M FFH and the $225M ORH within 3 years, and leave FFH free to take the subs' dividend capacity to takeout ORH -- and leave a cushion for any adverse development over the next 3 years.

 

This debt extension also opens the door of making an ORH takeout announcement before December 1st.  Again, if FFH needed dividend capacity to fund the privitization, they would need to wait for the regulators to validate their reserves, and only be able to announce any privitization transaction on or after Dec 1st. Buy issuing debt now, they may be able to offer a lower privitization value (e.g.: $60-$65 per share) versus waiting to Dec 1st. and possibly needing to pay $65 - $75 range.

 

Another support point to the ORH privitization thesis that I'm watching for is the announcement that ORH has used up the balance of their Normal Course Issuer Bid allowance. I think they had about $75M left after the Q2 and july buybacks. I don't know if this announcement would coincide with FFH privitization or precede it.  

 

My speculation is that ORH won't make it to the Q3 announcement :-).

 

cheers,

Vinay

[Smazz]

Considering FFHs current strong financial state shouldnt they be getting a bit more favourable (for FFH) coupon rate for their debt now?

 

If they were refinancing in their current state three years ago...yes.  But credit markets have tightened in the last year.  So, even with a better balance sheet, Fairfax may not get a better rate as they are BBB-rated. 

 

Take a look at Berkshire Finance which issued some notes on July 7th.  The 2018's are paying 5.4%, and that's an AAA-rated company.  Don't let the rating agencies fool you.  In these credit markets, Berkshire is still seen as AAA-rated company.  Cheers! 

 

yea,

dont get me started on the "rating agencies"

[oldye]

I would argue that a takeover of the remaining shares of ORH should be considerably more expensive than just a 25% premium to its recent market price.  If an insurance\reinsurance business enjoys cost-free float over the long-term and has every reasonable prospect of remaining as disciplined in the future, its true value should include float as part of shareholder's equity. In addition, if the investment of that float has been defensible and is expected to continue in a similar fashion, the business is worth at least the value of its investments.  Based on these notions, ORH's true value is more than $8 billion today.  That is more than twice its book value.  And before you berate me for such fanciful musings, that is the valuation metric used by BRK in its acquisition of GenRe, no?

 

That being the case, a slow takeover of ORH through repurchase of its own shares makes much greater sense. 

It also highlights to me just how undervalued ORH remains.

 

You are absolutely correct, thats why the buybacks below book are incredibly accretive to shareholders! 

[Cardboard]

"I would argue that a takeover of the remaining shares of ORH should be considerably more expensive than just a 25% premium to its recent market price.  If an insurance\reinsurance business enjoys cost-free float over the long-term and has every reasonable prospect of remaining as disciplined in the future, its true value should include float as part of shareholder's equity."

 

There is a precedent here which is Northbridge. It was bought for a 29% market premium and 1.3 times book value. It would mean $61 to $67.50 for ORH.

 

They don't have to offer a lot to take out a subsidiary where they already own 60+ %. All they have to do is to get a fair value opinion from some investment bank. They will come back and say that since most competitors trade at or below the valuation offer that the transaction is fair for shareholders. Where else can you go? It is not like that there will be a competing offer for the sub. The investment bank will also point out that shareholders who refuse to tender will end up with a stock that is extremely illiquid.

 

That is why it makes so much sense for Fairfax to buyout its subs now with P&C insurers valuation being low and that is what they have been doing: Northbridge, Advent... What is missing now is their biggest sub and it is trading on sale!

 

Over all these years, Odyssey Re never traded at a price that would make it interesting for Fairfax to pursue opportunities. The shares could never be used as a currency. People kept associating the company with property and cats reinsurers which is a totally different business. Odyssey Re is very well diversified by business segment, global and never got the recognition that it deserves.

 

Finally, regarding a Chinese acquisition, I suspect that Prem will enter the market a bit slowly or with the help of a partner. Think of ICICI in India. It could be a big move relative to Fairfax Asia, but small relative to Fairfax as a whole. I would be shocked if they were making a C&F or TIG size acquisition in China!

 

Cardboard

[StubbleJumper]

I would argue that a takeover of the remaining shares of ORH should be considerably more expensive than just a 25% premium to its recent market price.  If an insurance\reinsurance business enjoys cost-free float over the long-term and has every reasonable prospect of remaining as disciplined in the future, its true value should include float as part of shareholder's equity. In addition, if the investment of that float has been defensible and is expected to continue in a similar fashion, the business is worth at least the value of its investments.  Based on these notions, ORH's true value is more than $8 billion today.  That is more than twice its book value.  And before you berate me for such fanciful musings, that is the valuation metric used by BRK in its acquisition of GenRe, no?

 

That being the case, a slow takeover of ORH through repurchase of its own shares makes much greater sense. 

It also highlights to me just how undervalued ORH remains.

 

 

I wouldn't argue with your general logic that ORH is worth more than $47.  I threw out the 25% premium simply because that is a common rough magnitude in a takeover....in fact, when they bought back NB last year, it was at a 29% premium.  I would be surprised if they offered much more than $60/sh, but who knows?  FWIW, the "record high" for ORH was $54 in February, so $60 would be about a 10% premium over the record high.

 

Ratcheting up the note offering to $400m is very interesting indeed.  They have roughly $900m in holdco cash so adding $400m makes $1.3b.  That's one hell of a war-chest.  Is there any possibility that they'd be gearing up to buy a subsidiary of AIG?  Seems weird, as ORH should be a no-brainer.

 

I still like the idea of a share-exchange where they would issue FFH shares in exchange for ORH shares....but it's looking like that won't happen.

 

SJ

[Parsad]

I think the Chinese acquisition idea is probably gaining more traction.  Prem said in the last conference call that they were hoping to close on a Chinese deal.  Perhaps, the cash is being used for multiple transactions...debt, Chinese acquisition, Odyssey acquisition?  We'll find out soon enough.  Cheers!

[ValueBuff]

Would it be possible to use the holdco cash plus dividends from crum and northbridge to buy ORH and then the 500M from ORH for the chinese purchase?

[Guest misterstockwell]

With a less than stellar acquisition record, I'd vote for some other use for the cash!

[T-bone1]

I think the past experience with acquisitions suggests that they would rather pay a premium to buy an (likely overreserved) ORH for a premium than to get a better price on a book of business they don't know.

 

FFH and ORH have a lot more capacity than they are currently writing, so I think that suggests they would not be interested in a North American acquisition.

 

I agree that a Chine acquisition is more likely to be a small company they can grow than an established player. Also, publicly traded companies in China are not cheap right now, so it would be tough to get a good deal on a big company.

 

I still think this debt sale makes a lot of sense in its own right, but I have a tough time seeing FFH spend more than $100M or so to acquire anything other than ORH.

[triedtestedand]

What's it cost for FFH to buy ORH?   Two scenarios ...

 

a) Now

     - current BV ~ $52

     - assume premium of 1.25x book ~ $65

     - # shares not currently owned ~16M (~58.5M outstanding vs 42.4M owned)

     ... would cost them ~ $1040M (can speculate itself on how/where they would fund)

 

b) One year later

     - assume BV increase of 15%   = $60  (post Q2 spike in markets puts them well on that path)

     - assume premium of 1.25x book = $75

     - assume trades at average of $50 over that period (i.e. ~ 10% discount to BV)

     - assume ORH buys back 4M shares in the interim, so # shares not then owned reduced to 12M

     ... therefore would appear to cost them $900M in cash ... but ORH would have also spent $200M cash in the interim on buybacks

 

Buy now? Buy later?  I would suspect that shaking out ORH shares for buybacks will get progressively difficult as such speculation starts to occur ... and can see Feb '10 call action correspondingly starting to heat up.

     

[Alekbaylee]

What strikes me is the short timeframe. The announcement was made the 12th and the offering will close the 18th of August. Less than a week. Shouldn't be long before we hear more about their intent...

[returnonmycapital]

I do mot know what NB's long-term avg. ROE was, but ORH's is close to 20%.  Assuming a fair value opinion suggests a required rate of return of 10% on market capital, that would value ORH at close to 2X book anyway.

 

FFH would not offer far below that value given their penchant for fairness. 

 

IV for ORH is closer to 90 than 65.

[Cardboard]

Northbridge was doing 15% ROE and it was debt free. It also had a long history of favourable reserves development while it is not the case at Odyssey. Also, no asbestos and other nasty long tail stuff. If you ask previous Northbridge shareholders they will also tell you that $39 was not that much. I think that the high on the stock a year or so before was around $36. So it was fair ok.

 

I am sorry, but please do not expect 2 times book for ORH since they will not make such offer, if they make one at all. Reinsurers do not trade nowhere near close to the metrics that you are mentioning, so a fair value opinion will never require that. Read the fair value opinion on Northbridge and you will see what investment bankers look at, especially when it is a controlled sub.

 

Regarding funding to buy ORH, what about issuing a portion in FFH shares? ORH is below book currently, while FFH is above (based on June 30 numbers). Something like 40% of the acquisition paid with shares could mean a lower acquisition price since guys like Returnonmycapital would have a chance to continue holding, something considered by boards. Hence, it would be very light on dilution currently and reduce the need to rack up debt to do it all with cash.

 

Regarding timing, they better act fast since ORH shares are starting to fly and once the 13-F is published tomorrow or Monday, folks will figure out pretty quickly where book value really is for both.

 

Cardboard

[Stone19]

I thought orh needed to be its own stand alone type company with its own ratings and reporting to be able to do business with a number of its clients.Thats why I always thought that it would never be taken fully into the holdco.In other words it would always be a public company even if that meant that a small % was not owned by ffh.

[returnonmycapital]

I am happy to let my capital compound at 20% in ORH.  So, yes I think 65 would be, to quote a real estate term, a stink bid.  By holding FFH, or NB, I enjoy\ed about 15% compounded. 

 

To paraphrase the words of most competent investors,  I'll take a lumpy 20% over a lumpy 15% any day.

 

In addition to which, a company that can grow shareholder capital at 20% is even more highly prized than one that generates 15%.  Meaning, ORH should attract a premium valuation to FFH\NB regardless.