Author Topic: Fairfax preferreds  (Read 5469 times)

loerke

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Fairfax preferreds
« on: February 11, 2015, 08:22:35 AM »
The Fairfax preferred offerings are sharply discounted right now, and I'm not sure I understand why. On first glance they seem to me to present a good buying opportunity. I made a good return on Odyssey preferreds in the past and I am considering doing the same here. FFH.PR.G is trading at 18.02 in Toronto, offering a 7% yield. Fairfax has the option to redeem the shares at 25.00 on September 30; at such a discount, it might want to do so, given the very high yield due on the shares. I might be out of my depth in understanding preferreds but from q quick glance it seems like a good opportunity to me.


benhacker

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Re: Fairfax preferreds
« Reply #1 on: February 11, 2015, 08:56:13 AM »
Many of Fairfax preferred are rate reset preferreds.  The series G for example is 5% until Sept '15... then it resets from 5% (on $25 par) to 5yr Canadian rate + 2.56% - or roughly 3% at current rates.

Buyer beware.
Ben Hacker
Beaverton, Oregon - USA

Txvestor

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Re: Fairfax preferreds
« Reply #2 on: February 11, 2015, 08:57:10 AM »
I think the yield on these falls to 2.5% plus the 5-Year Government of Canada bond yield, so a shade under 3% as of now, on Sept 30th, at the discretion of Fairfax. I would suspect they will just roll it over at 3% for another 5 yrs. i think the holder has the option to convert to series H shares, i haven't looked at the terms on those.
I suspect the price drop is related to this. That said the drop in price gets your yield back up to 5% and if you are expecting deflation and needing income, i could think of worse places for your cash.
« Last Edit: February 11, 2015, 04:55:20 PM by Txvestor »

benhacker

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Re: Fairfax preferreds
« Reply #3 on: February 11, 2015, 09:11:22 AM »
The series H conversion turns them into a 3mo rate + 256 floater... also not valuable at this time.

$18 CAD may be an ok price, but just be sure you know what you are buying.
Ben Hacker
Beaverton, Oregon - USA

loerke

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Re: Fairfax preferreds
« Reply #4 on: February 11, 2015, 10:54:31 AM »
Thanks to you both for the careful, informed responses. I just read the series G prospectus, and you're right -- the yield drops sharply after September, and the option to convert to series H doesn't seem to be worth much. Still, I bought a few shares around 18 CAD, which means the yield after September works out to around 4.2%, and possibly higher if Canadian rates go up -- and if rates don't rise, then the price of the preferreds is likely to remain strong as the yield looks more attractive to investors. Strikes me as better than buying most corporate bonds out there, though it comes with somewhat greater risk. I'm just too nervous to buy the Fairfax common shares at the moment, though I've owned them in the past.

A_Hamilton

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Re: Fairfax preferreds
« Reply #5 on: February 11, 2015, 11:05:05 AM »
I look at it this way:

FFH issued these pref's when the market was substantially underestimating the risk of rates staying lower for an extended period (the market became more aware over time which is why the spreads on each series moved up over time), and, they did these offerings when the CAD was near par to the dollar. They likely converted all proceeds to USD immediately upon completion of the offering to hedge Northbridge back to the dollar.

Now, with certain series trading at a discount to par, and the CAD trading at a much cheaper price versus the USD, FFH has the option of using some capital to buy these things back through its normal course bid. They are unlikely to call these at par unless they've reduced the number of prefs outstanding to such an extent that it is not worth keeping the issue outstanding, or, the company wants to close out its hedge on Northbridge's activities. The interest rate is just too low for them to call it otherwise!

I'll give the hat tip on these pref's to Brian Bradstreet as it looks like the work of his genius, but I'd also be happy to learn that someone else at FFH deserves the credit!



 
« Last Edit: February 11, 2015, 12:30:28 PM by A_Hamilton »

obtuse_investor

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Re: Fairfax preferreds
« Reply #6 on: April 19, 2019, 08:29:52 AM »
Bumping up this topic. :)

FFH rate reset preferreds have been effectively tracking the Canada 5yr Bond (see attachment). Some of these are yielding to reset (YTR) at 6%. What confuses me is that they are trading at the same levels as 2016, when the Canada 5yr bond (https://ycharts.com/indicators/canada_5_year_benchmark_bond_yield) was at 0.6%. It is at 1.6% right now.  Is the market forecasting that Canada 5yr bond will drop back to 0.6% (which would imply a recession from today's levels). Even if that happens, these preferred may be a good value right now, since they are already discounting a negative future.

Best case: It is status quo 2 years from now, and these reset to (1.6 + 3.98 = 5.6%); which will lead to ~20% capital gain as well.
Worst case: Reality is that BoC is unable to lower rates, if US economy is strong. So, in worst case US and Canada hit a recession, leading to a zero bound once again. These will reset to about 4.5%, with minimal capital loss on the books. You're making 4.5% while you sit through a recession.

Not a bad risk/reward for a fixed income portion of the portfolio.

Am I missing something?

« Last Edit: April 19, 2019, 08:33:42 AM by obtuse_investor »
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wisowis

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Re: Fairfax preferreds
« Reply #7 on: April 19, 2019, 10:09:57 AM »
FYI there are a couple of pages of relatively recent discussion about the FFH prefs starting here: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/canadian-prefs/msg353578/#msg353578

obtuse_investor

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Re: Fairfax preferreds
« Reply #8 on: April 19, 2019, 04:44:31 PM »
FYI there are a couple of pages of relatively recent discussion about the FFH prefs starting here: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/canadian-prefs/msg353578/#msg353578

Thanks! I missed that thread.
It is interesting that that thread is focused on the ability of FFH to pay because it was mainly happening during the Q4 market swoon.
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StubbleJumper

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Re: Fairfax preferreds
« Reply #9 on: April 19, 2019, 05:04:39 PM »
FYI there are a couple of pages of relatively recent discussion about the FFH prefs starting here: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/canadian-prefs/msg353578/#msg353578

Thanks! I missed that thread.
It is interesting that that thread is focused on the ability of FFH to pay because it was mainly happening during the Q4 market swoon.


It didn't at all focus on ability to pay.  It focussed on risk adjusted return.  FFH has securities in the preferred space, but there are any number of other issuers that also have preferreds, so how to you rank their risk adjusted return?  And, how do you stack up the preferreds vis-a-vis the common? I have not seen much value in preferreds other than the notion that some how, some way, yields-to-worst will tighten and there'll be a capital gain on the back-end.  Maybe.

Or you can buy a chartered bank common with a 4-5% dividend rate which will likely grow and which will likely give you some capital gains.  In the worst case scenario, how many years would it take for one of the chartered bank commons to out-perform an FFH preferred?  Would it be 5 years in the worst case scenario?


SJ