ffh Senior Notes offering

[SharperDingaan]

 

Seems more likely that HW has a game changer in mind.

 

The whole hedge fund discount to BV argument is because HW investment performance is outshining the UW wrapper that provides its float. Were FFH a much bigger ‘name-brand’ UW with quality lines - we’d all be valuing at 1.6x BV versus .90x  and citing what great businessmen they are. Referencing.

 

We know FFH has a target debt/equity ratio & that there is material div capacity within the group. Perhaps FFH now has too much equity, & needs the debt to get them back on target? Or do they have a game changer in mind, & plan an equity issue to restore the ratio after it’s done?

 

Hopefully it is a piece of something very big, with invitation only blue-chip partners, possibly taking over a government administered asset? Partners to spread the financial operational risks over, & a once-in-a-lifetime opportunity for all. 

 

Disclosure: Long FFH common

 

SD

 

 

[Cardboard]

"Seems more likely that HW has a game changer in mind.

 

The whole hedge fund discount to BV argument is because HW investment performance is outshining the UW wrapper that provides its float. Were FFH a much bigger ‘name-brand’ UW with quality lines - we’d all be valuing at 1.6x BV versus .90x  and citing what great businessmen they are. Referencing."

 

I am 100% for the "name brand" idea as a I mentioned in a previous post. However, I am totally against some kind of huge acquisition. Surprises are always negative in insurance and this would likely be no exception: AIG left-overs, government plans... Might as well jump over a bridge. If Prem does something like that, then it would mean that he has not learned anything about the past 10 years. IMO, he would no longer qualify as a great manager since he can't learn from his mistakes and would seem addicted to growing the corporate empire. I doubt very much that he would do something like that, but just the thought is scary.

 

Regarding size, Fairfax already does $4.5 billion in earned premiums each year while Chubb is at $11 billion and Berkshire was writing the same amount of business as Fairfax as lately as 1997. Based on that, I don't believe that adding any more policies will create this "brand". We are big enough and we have enough spare capacity to increase that. Let's integrate things differently, do a couple tuck-in opportunistic acquisitions and the result will be eye popping.

 

Cardboard

[ERICOPOLY]

Andy Barnard has 412,715 shares of ORH.

 

I can imagine he will need to be kept happy with any buyout price. 

[T-bone1]

I agree. I think 1.3 times book value is the metric . . . at least in this market.

 

Lets not forget that Fairfax stands for Fair and Friendly Acquisitions. Even if ORH management didn't own a bunch of stock, I think this is a point of honor for FFH.

[ERICOPOLY]

Regarding ORH:

 

June 30, 2001:

Shareholders equity:  $862,848,000

Shares outstanding:   65,527,029

BVPS:  $13.16

IPO price $18

 

So I'm finding that the public offering was done at 1.37x book.  Wow, that was a pretty good deal.

[SharperDingaan]

 

Cardboard

 

Think a blue chip syndicate taking out all of AIG, backed with a 10yr+ central bank/fed reinsurance policy after the first $X of potential loss. WEB's mono-line coverage serving as the basic model.

 

No one company could afford the stand-alone risk, they would need to be multi-national, demonstrate deep & rational operating knowledge, be a fairly small like-minded group, & have a history of deep & patient capital. The central bank presence actually makes the $ a secondary issue.

 

And if your firm is a part of it ......

 

SD

 

[woodstove]

Very nice concept.  Fairfax could bring to the table, a team with disciplined approach to runoff, and experience with CDS.  As part of a group, sort of subcontractor for operational matters.  Fairfax is only 1/30th the mass of Berkshire, eg.  If a group, no-one seen as unfair beneficiary of govt largesse.  But Obama admin (and legacy of Bush admin too - bipartisan objective) has to get AIG resolved sooner than later, before the pitchforks come out.  And industry wants AIG's underdisciplined pricing and high-volatility event wagering to end also.

[valuecfa]

Is anyone else a bit confused as to why the 10-yr debt offering is to be placed in Canadian Dollars?

 

http://sec.gov/Archives/edgar/data/915191/000095012309035705/o56636ussuppl.htm

 

USE OF PROCEEDS

 

The net proceeds to be received by the Company pursuant to this offering are estimated at Cdn$394,906,000 after payment of the Agents’ fee and estimated expenses of the offering (assuming the Agents’ fee is Cdn$2,900,000).

 

The net proceeds of the offering shall be used to augment our cash position, to increase short term investments and marketable securities held at the holding company, to retire outstanding debt and other corporate obligations from time to time, and for general corporate purposes.

[Redskin212]

I wasn't sure why the offering was in Canadian dollars either, but after reflection I am guessing that Hablim Watsa views the Canadian Dollar as being overvalued here at 92 cents.

[valuecfa]

Given the term of the note, i think that a US$ note would have been more appropriate. Especially given the U.S. fiscal and monetary situation that Buffett himself has said will hurt the US Dollar and bring about inflation in the future. If there is the inflationary scenario Buffet expects during this 10yr period, i would think the Canadian currency would be more valuable over the next 10yrs than the U.S. Dollar, especially given that the Canadian $ is a commodity currency.

[smw397]

Setting aside the likelihood of an ORH buyout, would it make more sense to borrow Canadian dollars if they're looking at a Canadian takeover target?

[Cardboard]

Who knows what the reasons truly are for the $CDN?

 

There could be more appetite for Fairfax debt in Canada. It is led by BMO and all other dealers in the offering except for Bank of America Merrill Lynch are Canadian based.

 

They could also have looked at their debt mix and decided that they needed more CDN$ denominated debt.

 

Believe it or not, this may still have something to do with the Northbridge acquisition earlier this year. Public shareholders have been paid with cold hard CDN$, but some entity within Fairfax could still be owed something. For example, I brought a quote in a different post where Crum & Forster was given a note from NSpire Re to pay for its Northbridge shares.

 

On a consolidated basis, one thing is for sure, you don't issue $362 million U.S. in debt at 7.5% to let it sit in cash, especially when there is already $3.316 billion in cash at the various subs and $271.4 million at holdco (cash only).

 

Cardboard

[valuecfa]

I haven't looked at their debt denominations relative to assets in any real detail as of yet. Perhaps they just are trying to match up some assets and liabilities in the same currency CDN$, to reduce currency fluctuation/exposure on Canadian held assets. Perhaps Northbridge or long term Canadian equity investments. However, if this is strategic...if they forsee CDN$ debt as more attractive than US$ debt over a 10yr period, I would be interested to know why, as i don't see it.

[FFHWatcher]

If it were a Cdn buyout (which initially makes sense), than it still doesn't explain why FFH went from $150M to $400M in 24 hours.  In fact, the $150M to $400M change in 24 hours likely only supports debt repurchase theory.  

"Hey, let's refinance $150M of our debt coming due in a few years."  Next Day meeting.  "Huge demand for our $150M debt issuance.  Lead U/W's say they can likely find buyers for at least $400M with multiple buyers wanting close to $150M themselves (ie. Mackenzie Financial, OMERS, TPP, etc.).  Want to really push out our maturities?"  Response.  "Why wouldn't we?"  

 

Today is the 18th of August.  Day of closing, no?