Does anyone have an opinion on the likelihood that FFH will need to do an equity offering in the near term to shore up their balance sheet? My guess is they are ok today. However, there are risks moving forward:
1.) possible operating losses in Q2 and Q3
2.) sizable impairments on equities/associates (Recipe and Toys R Us are flashing red and there are more)
Offsetting this will be some gains in their equity portfolio since March 31. The $2.9 billion in bonds they bought likely also will see some nice price appreciation. Dividend and interest income is also now a $900 million run rate which is very good (especially given the sale of 40% of runoff).
What do people think? Too many moving pieces and when combined with the virus (path unknown) simply too hard?
Best case scenario for Fairfax is a vaccine is discovered that can be deployed in volume in Q4.
My interest in FFH right now is as a short term trade. The company is out of favour. And the sector is out of favour. And the stock price has been very volatile of late.
Stock Price = US $250
BV = US $422
P/BV = 0.59
If we adjust BV to reflect Associates at fair value Vinod estimates BV = $390
P/adj BV = 0.64
Petec also suggested discounting BV further to reflect Fairfax India and Fairfax Africa at fair value
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Some notes after listening to the conference call:
- CR was decent at 96.8, with 2.6 points for Covid 19.
- Covid exposure is manageable with largest exposure at Brit and Odyssey
- expects to post underwriting profit for the year (even after Covid losses)
- expects written premiums to fall in Q2 and Q3 and rebound in Q4 as economic activity gets back to normal; expect flat for the year
- purchased $2.9 billion in US corporates; yield = 4.25% and term = 4 years ($123 million in interest income per year)
- run rate for interest and div income is $900 million
- continuing to focus on redeploying cash to grow this
- Riverstone divestiture happened March 31. 40% sold for $600 million. Continue to hold 60% valued at $605 million.
- debt offering in April $645 at 4.625% will add $30 million to interest expense per year
Balance Sheet
- had $700 million cash At hold co
- drew $1.8 billion of credit line; cash = $2.5 billion
- April debt issue = $645; total cash, net on credit line = $1,345 billion
- as global economies restart expect to pay down credit line
Can someone help me out with what happened to the $600 million proceeds (March 31) from the Riverstone sale? Is that included in the above figures?
- said FIH, FAH, Recipe and TC all have access to financing and do not need $ from Fairfax
- said covid did not affect long term value of Bangalore Airport
- Atlas, largest equity holding by far, reported decent Q1 results with strong future guidance (expects manageable impact from Covid)
Good questions and good thought process.
I'm not sure that an equity issue is necessary any time soon. But, the covenants on FFH's revolver do represent a bit of a risk.
After the Q1 release, I spilled a bit of ink whining about how they were at a debt:equity of 0.34:1 on March 31, and their max ratio under the covenant is 0.35:1. My whining was that it wouldn't take an outrageous collection of insurance catastrophes to amount to amount to a $1B hit to their consolidated equity, which would trigger a bit of scrambling to manage the revolver covenant. Similarly, if equity markets take another leg down from where they were on March 31, it would only take about a hit of ~$500m to their equities compared to March 31 to leave FFH scrambling. Neither of those events are terribly likely, but IMO, they are entirely conceivable, which is why I don't love this situation of being reliant on that revolver. The good news is that the holdco is carrying so much cash equivalents that they could easily get "on side" with the covenant by trimming holdco cash equivalents and repaying a portion of the revolver...but the bad news is that the whole point of negotiating and paying stand-by fees for a large revolver is so you have flexibility and in the end you might not even be able to draw on it. Happily, the revolver is good until Christmas 2022, so as long as they respect the covenants, all is good.
I do not view Recipe and Toys as being particularly vulnerable to a write-down any time soon. You would need to make the assessment that the assets are permanently impaired. While I don't love either of those businesses, at this point they are basically closed with the intention of fully reopening when social distancing measures are relaxed. It would probably take at least couple of years of shitty sales and income after the full reopening to conclude that the businesses are fundamentally damaged and permanently impaired. However, despite Prem's assurances that they will not need cash from the holdco, I do worry that if this closure is prolonged, they will end up burning through their revolvers and could ultimately require a cash injection to support their working capital needs when the restart occurs. Does FFH have a spare $75m for Toys or a spare $200m for Recipe if that should become necessary?
It's trite to say it, but if everything goes well, everything will go well. What is the holdco's cash situation between now and March 31, 2021? I think it looks a bit like this:
Sources:Cash at March 31, 2020: $2,483
Debt issue: $645
Subsidiary dividends: $?
Management fees: $? (this is what holdco gets from Fairfax India/Africa or Hamblin Watsa)
Interest/divvies on the $2.5B holdco cash: ~$50
Uses:Revolver repayment in April 2020: $500
Holdco interest payments for 12 months: ~$300 (based on $5.2B holdco debt)
Holdco operating/admin: ?
Purchase of Brit minority stake: $100 (but nothing says that this cannot be paid from an insurance subsidiary)
Preferred and common divvy: $300 (assumes that FFH declares a $10 common divvy at Christmas 2020)
If you assume that the holdco cash inflows from management fees and subsidiary dividends exactly offset its cash outflows for operating/admin costs, the holdco would have about $1.9B cash on March 31, 2021. So as I so tritely said, if everything goes well, everything will go well. But, if they need to take a large, unfavourable equity mark or they experience a very bad cat year, they could be in the situation of needing to repay part of that revolver to respect their covenants, and then cash at March 31, 2021 might not look so rosy.
SJ
*PS, my understanding is that Riverstone closed on March 31, meaning that the proceeds should be part of the $2.5B holdco cash.
