Fairfax preferred shares

[wondering]

Hi Everyone.

 

This is my first post.  I am a real beginner and my questions may seem simplistic, but I got start somewhere.  Anyways my question...

 

Family members are asking about relatively safe investments (they are willing to take a bit of capital risk) with more income than your average GIC etc...

 

I thought of the FFH preferred shares as a possibility.  They have yields ranging from 5.1% to 6.2%, and they are trading near their 52 week low.

 

My question has two parts

 

a) These preferred shares are redeemable at the company's option.  If they are not redeemed the shareholder has the right, at their, option of converting the pref shares to another class of pref shares which essentially will reset at a lower payout than current, all things being equal (i.e. for most classes of pref shares, the stated payout is 5%, after the redeemption date it is 3mos TBill rate plus rates ranging from 2.16% to 3.51%).  See note 16, page 73 of the 2012 AR.  Question.  If FFH does not redeem, the holders of the prefs can only A) sell their shares or B) convert to the new prefs.  Is my understanding of how redeemable and convertible pref shares work?

 

b) Under what circumstances would FFH not redeem the pref shares?  Here are my thoughts about my own question

 

- I know with common shares, the general rule a company will buyback the shares when shares are cheap.  Currently, the FFH pref shares are trading below their stated value.  Somehow, I don't think this rule applies to pref shares.

 

- I think the more likely answer is that it depends on the capital needs of FFH at the time of the redeemption.  As stated above, the un-redeemed pref reset at a lower payout (assuming TBill rates don't change from present).  If I were to take a guess, I would say FFH would not redeem the shares.

 

Please correct me if I got any of my facts wrong. 

 

Wondering.

[A_Hamilton]

1.) You are correct. They are unlikely to redeem. Also, I think they think low rates are here to stay, so the option to convert the prefs isn't worth much.

2.) I contend that these prefs are an inexpensive way for them to 1.) get capital and 2.) short the Canadian dollar.