Fairfax 2020

[petec]

1) I haven’t thought it through your way, because I don’t know the regulatory rules, but they’re at $800m ish now and said that $1bn was a reachable target before spreads gapped out, so I can only assume it’s more reachable now.

There are two things that have happened over the past few weeks.  The spreads have gapped out, but the risk-free has fallen like a stone:

https://www.bloomberg.com/markets/rates-bonds/government-bonds/us

Short-term governments have dropped from ~2.4% interest in 2019 to ~0.4% interest today, and it has occurred across all short maturities from 3 months to 2 years.  Any governments that need to be rolled in 2020 will face a drastically lower rate.  FFH has $8B of bonds that mature during 2020 and probably about $10b or $11b of cash equivalents.  Assuming that is 75% governments, that might be a total of about $13B in governments that will take a 2% interest rate haircut during 2020, which might reduce interest income by ~$260m for the government portion of the portfolio.  Assuming that there is $5B of corporates that will be rolled, you'd need to gain an extra 500 bps on the corporates you roll to just offset the lower interest rates on the governments.  The math is not particularly nice for FFH on this front.


SJ

No that’s fair. I guess my base case is that when we come out of this the reverse happens: short govt yields rise and spreads compress. That means the short govts don’t have to roll onto much lower rates but that anything that’s been redeployed into corporates earns a higher rate. I think that’s reasonably probable, but it’s also a best case.

[petec]

I just hope that they are not shorting all the wrong names Einhorn-style (I.e. all FANG powerhouses listed in the Annual Letter)

I do think it’s very odd, the stocks they chose to highlight in the letter. Ok they’re not optically cheap, but they’ve largely got spectacular business models and growth. There was likely a bubble in some names, and particularly among the unprofitable story stocks, but not the ones they named.

[Xerxes]

For those of us who are uninitiated in the world corporate bond trading, is there an index based on European corporate bonds that can be bought to capitalize on the short-med term widening of credit spreads ?

[bearprowler6]

An update on the Horizon North and Dexterra transaction:

http://www.horizonnorth.ca/news-and-knowledge-centre/news/horizon-north-logistics-inc-announces-covid-19-response-including-reductions-to-2020-capital-spending-program-and-other-costs-and-reiterates-commitment-of-all-parties-to-transaction-with-dexterra-and/

[petec]

Just going through the call.

Eurolife buyout will probably be done by Eurolife, not holdco.

Brit will be about $100m.

Allied is bigger but given capital at Allied I wonder if Allied could also buy itself.

I wonder if this is a piece of the holdco liquidity puzzle that we are missing.

doesn't answer how they fund premium growth though.

[bearprowler6]

Status of OMERS purchase of 40% of Riverstone UK?

When the deal was announced on December 20/19 it was expected to close by end of Q1 2020 (subject to regulatory approval).

Well here we are...at the end of Q1 2020. Any news on this deal?

[Cigarbutt]

Status of OMERS purchase of 40% of Riverstone UK?
When the deal was announced on December 20/19 it was expected to close by end of Q1 2020 (subject to regulatory approval).
Well here we are...at the end of Q1 2020. Any news on this deal?

FWIW, the European Commission cleared the merger on Feb 26 (simplified merger review procedure).

[Xerxes]

From the blackberry call this evening:

Analyst:   given macro environment, how much do you need and what are your plans for the convert

Chen:   after paying the convert we $385m of cash/equivalent. we made some assumptions (guessing he means scenarios. We will pay back the convert, but saving $23m on interest, obviously cash balance will go down, we also assume the debt market is closed so assumed no financing  ...…. quite comfortable that they liquidity

[petec]

From the blackberry call this evening:

Analyst:   given macro environment, how much do you need and what are your plans for the convert

Chen:   after paying the convert we $385m of cash/equivalent. we made some assumptions (guessing he means scenarios. We will pay back the convert, but saving $23m on interest, obviously cash balance will go down, we also assume the debt market is closed so assumed no financing  ...…. quite comfortable that they liquidity

"We have made some assumptions under a stress test environment":
1. repay the convert.
2. no refinancing.
3. no layoffs.
4. revenue down "20%, 30%, 50%".

Result: they're comfortable for a couple of years except in "extreme scenarios", whatever that means.

[bearprowler6]

Status of OMERS purchase of 40% of Riverstone UK?
When the deal was announced on December 20/19 it was expected to close by end of Q1 2020 (subject to regulatory approval).
Well here we are...at the end of Q1 2020. Any news on this deal?

FWIW, the European Commission cleared the merger on Feb 26 (simplified merger review procedure).

Since the "deadline" (end of Q1 2020) outlined at the time the sale of 40% of RiverstoneUK has now been missed I think we can fairly assume the sale to OMERS is in trouble? Or at the very least being repriced?

Fairfax needs to communicate on this one......

Furthermore, their equity holdings are getting crushed including but not limited to:

-Blackberry
-Eurobank
-Resolute Forest Products
-Stelco
-Recipe
-Kennedy Wilson

In my view and I fully expect that others will disagree with this....a lifetime of work is being wiped out. Fairfax does not have adequate liquidity. The long term does not matter when you can't pay your current bills. Prem said he learned his lessons. Obviously not.

The tide is out and....well we know what that means.....ugly indeed....