Fairfax 2020

[TwoCitiesCapital]

Just seems strange. Why plow $2.9 billion into corporate debt yielding 4.25% to just then go float a note for $600 million paying 4.65%?

I mean, I get that the money is in different places with the subsidiaries owning the corporates and the holding company issuing the debt, but this seems like bad economics to me unless if the revolver is more onerous and this is repaying that?

[petec]

The $2.9bn is part of the float. It’s not just in a different place, it has a fundamentally different purpose and it’s not really owned by FFH because it is “owed” to policyholders. For example, it cannot be used to recapitalize the insurance subs to help them grow in a hard market, and it can’t be used to buy back FFH shares for cancellation.

The cash at the holdco does belong to FFH. The question is how it’s funded. It can be equity or debt and if it’s debt it can be revolver or term. All that’s happening here is that they’re terming out most of the portion of the revolver debt that they’ve already spent (but not the portion they drew down last quarter as a precaution).

If one took your line of thinking, it would never make sense to buy treasuries, which by definition yield less than the cost of debt or equity funding. But it does make sense to buy treasuries, because they’re funded by float at (hopefully) a sub-100 CR.

[StubbleJumper]

Just seems strange. Why plow $2.9 billion into corporate debt yielding 4.25% to just then go float a note for $600 million paying 4.65%?

I mean, I get that the money is in different places with the subsidiaries owning the corporates and the holding company issuing the debt, but this seems like bad economics to me unless if the revolver is more onerous and this is repaying that?

I think the short answer is that FFH floated 10-year debt, which they need for the longer term financing of the holdco, while the corporates at 4.25% will likely be sold in roughly a year for a realised gain.  What is more, the corporates were largely funded from the revolver, which is a good tool to use opportunistically to exploit the temporary displacement of credit markets, but it's not a great tool for the longer term financing of the holdco. 

The money was made when FFH bought the corporates a few weeks ago, but it won't be realised until 2021.


SJ

[petec]

Just seems strange. Why plow $2.9 billion into corporate debt yielding 4.25% to just then go float a note for $600 million paying 4.65%?

I mean, I get that the money is in different places with the subsidiaries owning the corporates and the holding company issuing the debt, but this seems like bad economics to me unless if the revolver is more onerous and this is repaying that?

I think the short answer is that FFH floated 10-year debt, which they need for the longer term financing of the holdco, while the corporates at 4.25% will likely be sold in roughly a year for a realised gain.  What is more, the corporates were largely funded from the revolver, which is a good tool to use opportunistically to exploit the temporary displacement of credit markets, but it's not a great tool for the longer term financing of the holdco. 

The money was made when FFH bought the corporates a few weeks ago, but it won't be realised until 2021.


SJ

The corporates were bought in the insurance subs investment portfolios. They’re funded by premiums, not holdco debt.

I think you’re confusing the part of the revolver that was drawn down in Q1, which was reinvested “at a positive spread” (which may imply corporates, but they didn’t say that) but basically sits at the holdco as cash or near-cash in case of emergencies, with the part that was drawn down earlier and used for general holdco purposes, like recapping the subs, and has now been termed out.

[StubbleJumper]

Just seems strange. Why plow $2.9 billion into corporate debt yielding 4.25% to just then go float a note for $600 million paying 4.65%?

I mean, I get that the money is in different places with the subsidiaries owning the corporates and the holding company issuing the debt, but this seems like bad economics to me unless if the revolver is more onerous and this is repaying that?

I think the short answer is that FFH floated 10-year debt, which they need for the longer term financing of the holdco, while the corporates at 4.25% will likely be sold in roughly a year for a realised gain.  What is more, the corporates were largely funded from the revolver, which is a good tool to use opportunistically to exploit the temporary displacement of credit markets, but it's not a great tool for the longer term financing of the holdco. 

The money was made when FFH bought the corporates a few weeks ago, but it won't be realised until 2021.


SJ

The corporates were bought in the insurance subs investment portfolios. They’re funded by premiums, not holdco debt.

I think you’re confusing the part of the revolver that was drawn down in Q1, which was reinvested “at a positive spread” (which may imply corporates, but they didn’t say that) but basically sits at the holdco as cash or near-cash in case of emergencies, with the part that was drawn down earlier and used for general holdco purposes, like recapping the subs, and has now been termed out.

You are correct that FFH did not explicitly state that the revolver drawdown was invested in corporates, but simply that it was invested at a favourable spread.    I took the mental short cut to assume that the only way to get a favourable spread would be to invest it in risky bonds (risk-free only yields about 0.50%).  But, it is always possible that they found some sort of state/provincial/municipal debt or some sort of agency debt that yields enough to constitute a favourable spread.  Whatever sort of risky bonds they bought at the holdco level are likely to be sold in 2021 if the risk-free returns to a sane level and the spreads narrow back to near pre-covid levels. 

Out of curiosity, where did you see that the revolver draw for re-capping the subs has been termed out?  The risk of using a revolver for that purpose has always been that it needs to be regularly renegotiated and who knows what kind of covenants the lender will end up demanding.  But, if it's termed out for, say 5 years, that would be great.


SJ

[bearprowler6]

Just seems strange. Why plow $2.9 billion into corporate debt yielding 4.25% to just then go float a note for $600 million paying 4.65%?

I mean, I get that the money is in different places with the subsidiaries owning the corporates and the holding company issuing the debt, but this seems like bad economics to me unless if the revolver is more onerous and this is repaying that?

Regardless of how you slice it or try to spin it.....Fairfax is over leveraged and continues to have considerable funds (at the corporate as well as the subsidiary levels) tied up into a long series of illiquid under-performing equity investments as well as highly questionable non-publically traded  non-insurance subsidiaries. Furthermore, with Paul Rivett stepping aside (and I continue not to believe the party line on his reasons why) the company is without a solid executive transition plan despite its aging executive management team. In addition, the industry as a whole faces massive headwinds given the current ultra low interest rate environment. The weakness of their  focus on restaurants and retail has now been exposed. Their restaurant bet via Recipe is simply not financially viable given how restaurants will need to restructure until a COVID vaccine exists.

And yes I know --- their equity picks (Eurobank, Blackberry, Atlas Corp etc) are currently offering great long term value at these levels. Do they offer the best long term value (all things considered) of all the possible equity investments out there at this time? No way! And I am not talking short term here---I mean over any reasonable long term horizon.

I could go on but why bother. Those of us who have seen the light are out of this stock completely or have greatly reduced our positions. Those who still believe will learn soon enough.


I think the short answer is that FFH floated 10-year debt, which they need for the longer term financing of the holdco, while the corporates at 4.25% will likely be sold in roughly a year for a realised gain.  What is more, the corporates were largely funded from the revolver, which is a good tool to use opportunistically to exploit the temporary displacement of credit markets, but it's not a great tool for the longer term financing of the holdco. 

The money was made when FFH bought the corporates a few weeks ago, but it won't be realised until 2021.


SJ

The corporates were bought in the insurance subs investment portfolios. They’re funded by premiums, not holdco debt.

I think you’re confusing the part of the revolver that was drawn down in Q1, which was reinvested “at a positive spread” (which may imply corporates, but they didn’t say that) but basically sits at the holdco as cash or near-cash in case of emergencies, with the part that was drawn down earlier and used for general holdco purposes, like recapping the subs, and has now been termed out.

You are correct that FFH did not explicitly state that the revolver drawdown was invested in corporates, but simply that it was invested at a favourable spread.    I took the mental short cut to assume that the only way to get a favourable spread would be to invest it in risky bonds (risk-free only yields about 0.50%).  But, it is always possible that they found some sort of state/provincial/municipal debt or some sort of agency debt that yields enough to constitute a favourable spread.  Whatever sort of risky bonds they bought at the holdco level are likely to be sold in 2021 if the risk-free returns to a sane level and the spreads narrow back to near pre-covid levels. 

Out of curiosity, where did you see that the revolver draw for re-capping the subs has been termed out?  The risk of using a revolver for that purpose has always been that it needs to be regularly renegotiated and who knows what kind of covenants the lender will end up demanding.  But, if it's termed out for, say 5 years, that would be great.


SJ

[petec]

Just seems strange. Why plow $2.9 billion into corporate debt yielding 4.25% to just then go float a note for $600 million paying 4.65%?

I mean, I get that the money is in different places with the subsidiaries owning the corporates and the holding company issuing the debt, but this seems like bad economics to me unless if the revolver is more onerous and this is repaying that?

I think the short answer is that FFH floated 10-year debt, which they need for the longer term financing of the holdco, while the corporates at 4.25% will likely be sold in roughly a year for a realised gain.  What is more, the corporates were largely funded from the revolver, which is a good tool to use opportunistically to exploit the temporary displacement of credit markets, but it's not a great tool for the longer term financing of the holdco. 

The money was made when FFH bought the corporates a few weeks ago, but it won't be realised until 2021.


SJ

The corporates were bought in the insurance subs investment portfolios. They’re funded by premiums, not holdco debt.

I think you’re confusing the part of the revolver that was drawn down in Q1, which was reinvested “at a positive spread” (which may imply corporates, but they didn’t say that) but basically sits at the holdco as cash or near-cash in case of emergencies, with the part that was drawn down earlier and used for general holdco purposes, like recapping the subs, and has now been termed out.

You are correct that FFH did not explicitly state that the revolver drawdown was invested in corporates, but simply that it was invested at a favourable spread.    I took the mental short cut to assume that the only way to get a favourable spread would be to invest it in risky bonds (risk-free only yields about 0.50%).  But, it is always possible that they found some sort of state/provincial/municipal debt or some sort of agency debt that yields enough to constitute a favourable spread.  Whatever sort of risky bonds they bought at the holdco level are likely to be sold in 2021 if the risk-free returns to a sane level and the spreads narrow back to near pre-covid levels. 

Out of curiosity, where did you see that the revolver draw for re-capping the subs has been termed out?  The risk of using a revolver for that purpose has always been that it needs to be regularly renegotiated and who knows what kind of covenants the lender will end up demanding.  But, if it's termed out for, say 5 years, that would be great.


SJ

Well in effect they’ve termed it out. They’ve just issued a 10y bond and the stated use of proceeds is to repay the revolver.

Maybe they’ll keep the revolver wholly drawn, but cash/near cash at the holdco then rises. Same effect.

Agree re risk free rate at 0.5% but I guess my broader point is I did not take the $2.9bn of corporates to include holdco reinvestment of the revolver draw. I assumed that was all in the investment portfolio.

[Bryggen]

hi all,
would love to hear your take on the depressed share price. Bought 5 years ago in the high 500 and it hasn't turned out quite as good as I expected. Now, the drop we suffered the past month or so hurts. As most of you, I am in for the long run with FFH , but still have some concerns of the inability to drive the share price to its actual value.
Any thoughts?
Thanks!

[Xerxes]

I will give my opinion. The current downdraft on the share price is probably due to some and of points below.

- anticipating a mark-to-market decline on BV due to the positions that are marked-to-market (i.e. BB etc.)
- liquidity concern with holding company
- the trading liquidity becomes apparent during market downturn
- FX rate USD:CAD; share price today in $CAD is the same as in 2013, but with a very different FX rate.
- systematic concern with larger holdings that are equity accounted (Recipe, Seanspan, Eurobank) all of which are getting a covid broadside hit
 
of the above, (1) and (5) are general market condition, so will reverse in time. And then it becomes function of good those individual picks were as oppose to correlation racing to 1.
(4) and (3) you cannot do anything about it.
(2) is probably is no concern based on previous posters

[petec]

All that, and the fact that if you look at the last 10 years FFH can't invest for sh1t, so one of the key value drivers is broken. That impacts the p/bv the market will pay.

On the positive side:
1) We are likely in a hard market, which drives better CR's and investment leverage.
2) Several of FFH's big holdings (especially ATCO and EUROB in my view) look very cheap.
3) FFH are working to improve investment decisions, although it's a leap of faith to assume this will work.