Fairfax India new issue

[StubbleJumper]

The more I think about it, the less ethical it seems. Shareholders are the ones paying for this guarantee, while management (via performance fee) are the ones benefiting from it.

You are correct, but I would add a bit of precision.  It's not management that benefits, its FFH that benefits via the performance fee.  That's might be trite, but I make that point because it is important to recognize where Prem's financial interest resides.  It resides in the performance of FFH shares, not FFH India.

I am certain that people are tired of me dredging up the ancient past, but this is nothing new.  When FFH bought out ORH, we did not really have a fully independent management cadre or board of directors to ensure that ORH shareholders received full value in that buyback.  Prem had access to a larger collection of ORH financial data than did minority shareholders, so we did not know at the time that he was effectively buying ORH at book value (although as Chairman of ORH, it is almost certain that Prem would have been aware of that).  Okay, it mostly worked out.  Most of us made good money on ORH, but I remain unconvinced that we received a fair price for our shares.  The lesson here is that if there is a divergence between Prem's personal financial interest and your personal financial interest, you would be well advised to consider measures to ensure that your interests are well aligned with his.

Do I need to dredge up Abitibi Bowater?  It's basically the same conclusion.  Understand where Prem's financial interests reside!


SJ

[petec]

The more I think about it, the less ethical it seems. Shareholders are the ones paying for this guarantee, while management (via performance fee) are the ones benefiting from it.

You are correct, but I would add a bit of precision.  It's not management that benefits, its FFH that benefits via the performance fee.  That's might be trite, but I make that point because it is important to recognize where Prem's financial interest resides.  It resides in the performance of FFH shares, not FFH India.

I am certain that people are tired of me dredging up the ancient past, but this is nothing new.  When FFH bought out ORH, we did not really have a fully independent management cadre or board of directors to ensure that ORH shareholders received full value in that buyback.  Prem had access to a larger collection of ORH financial data than did minority shareholders, so we did not know at the time that he was effectively buying ORH at book value (although as Chairman of ORH, it is almost certain that Prem would have been aware of that).  Okay, it mostly worked out.  Most of us made good money on ORH, but I remain unconvinced that we received a fair price for our shares.  The lesson here is that if there is a divergence between Prem's personal financial interest and your personal financial interest, you would be well advised to consider measures to ensure that your interests are well aligned with his.

Do I need to dredge up Abitibi Bowater?  It's basically the same conclusion.  Understand where Prem's financial interests reside!


SJ

Sensible advice for most investments tbh!

[bizaro86]

I would say any time I'm paying a 20% incentive fee, knowing that it will be calculated fairly is important to me.

[StubbleJumper]

I would say any time I'm paying a 20% incentive fee, knowing that it will be calculated fairly is important to me.

You are expecting Fairfax to suddenly play fair?  Don't hold your breath.

I'm not a big fan of the short-and-distort crowd that made the short attack on FFH in '03 and '04, but they were actually right about one thing.  When FFH holdco was cashflow challenged, Prem engineered an ingenious move whereby FFH bought a slug of ORH shares from an institutional holder by issuing convertible notes to that holder that convertible back into the ORH shares. Effectively, Prem "borrowed" the ORH shares from the institutional holder to enable FFH's holding to pop above 80%.  At that point ORH was consolidated into FFH's financial statements for income tax purposes.  This allowed FFH to use hundreds of millions of dollars of tax loss carry-forwards from TIG and C&F that would otherwise fall off the table.  ORH made the tax payments to FFH, and then FFH offset them against the loss-carryforwards, which gave the holdco an enormous shot of cash.

Was it legal?  The IRS said it was legal.  Was it ethical to pretend that you owned 80% of ORH when the reality was that the shares were borrowed?  Well, I'll leave that one for you to decide.

The moral of all of these stories is that Prem is very clever and very self-interested.


SJ

[Viking]

I would say any time I'm paying a 20% incentive fee, knowing that it will be calculated fairly is important to me.

You are expecting Fairfax to suddenly play fair?  Don't hold your breath.

I'm not a big fan of the short-and-distort crowd that made the short attack on FFH in '03 and '04, but they were actually right about one thing.  When FFH holdco was cashflow challenged, Prem engineered an ingenious move whereby FFH bought a slug of ORH shares from an institutional holder by issuing convertible notes to that holder that convertible back into the ORH shares. Effectively, Prem "borrowed" the ORH shares from the institutional holder to enable FFH's holding to pop above 80%.  At that point ORH was consolidated into FFH's financial statements for income tax purposes.  This allowed FFH to use hundreds of millions of dollars of tax loss carry-forwards from TIG and C&F that would otherwise fall off the table.  ORH made the tax payments to FFH, and then FFH offset them against the loss-carryforwards, which gave the holdco an enormous shot of cash.

Was it legal?  The IRS said it was legal.  Was it ethical to pretend that you owned 80% of ORH when the reality was that the shares were borrowed?  Well, I'll leave that one for you to decide.

The moral of all of these stories is that Prem is very clever and very self-interested.


SJ

Stubble, thanks for the trip down memory lane... great summary of many things i had long forgotten (although i do still remember the day the ORH deal was announced... it was my biggest one day gain ever :-)

[Cigarbutt]

I would say any time I'm paying a 20% incentive fee, knowing that it will be calculated fairly is important to me.

You are expecting Fairfax to suddenly play fair?  Don't hold your breath.

I'm not a big fan of the short-and-distort crowd that made the short attack on FFH in '03 and '04, but they were actually right about one thing.  When FFH holdco was cashflow challenged, Prem engineered an ingenious move whereby FFH bought a slug of ORH shares from an institutional holder by issuing convertible notes to that holder that convertible back into the ORH shares. Effectively, Prem "borrowed" the ORH shares from the institutional holder to enable FFH's holding to pop above 80%.  At that point ORH was consolidated into FFH's financial statements for income tax purposes.  This allowed FFH to use hundreds of millions of dollars of tax loss carry-forwards from TIG and C&F that would otherwise fall off the table.  ORH made the tax payments to FFH, and then FFH offset them against the loss-carryforwards, which gave the holdco an enormous shot of cash.

Was it legal?  The IRS said it was legal.  Was it ethical to pretend that you owned 80% of ORH when the reality was that the shares were borrowed?  Well, I'll leave that one for you to decide.

The moral of all of these stories is that Prem is very clever and very self-interested.
SJ

Stubble, thanks for the trip down memory lane... great summary of many things i had long forgotten (although i do still remember the day the ORH deal was announced... it was my biggest one day gain ever :-)

I just want to add that, even if this was a grey area, the tax consolidation move was both clever and appropriate. The context included a potential material write-down of tax assets, further credit downgrades and other subsequent reflexive and potentially firm-threatening spiral. One can question the way they obtained the IRS acquiescence but, for this specific 'deal', I came to the conclusion that this was the best and most appropriate course of action.
To tax consolidate without the economic interest is controversial but the intent of the transaction was a prelude to full consolidation. For those interested, the IRS continued to show discomfort with this type of transaction or perhaps that specific transaction:
https://www.irs.gov/pub/irs-utl/am2012007.pdf

---) Back to the Fairfax India issue

[StubbleJumper]

I would say any time I'm paying a 20% incentive fee, knowing that it will be calculated fairly is important to me.

You are expecting Fairfax to suddenly play fair?  Don't hold your breath.

I'm not a big fan of the short-and-distort crowd that made the short attack on FFH in '03 and '04, but they were actually right about one thing.  When FFH holdco was cashflow challenged, Prem engineered an ingenious move whereby FFH bought a slug of ORH shares from an institutional holder by issuing convertible notes to that holder that convertible back into the ORH shares. Effectively, Prem "borrowed" the ORH shares from the institutional holder to enable FFH's holding to pop above 80%.  At that point ORH was consolidated into FFH's financial statements for income tax purposes.  This allowed FFH to use hundreds of millions of dollars of tax loss carry-forwards from TIG and C&F that would otherwise fall off the table.  ORH made the tax payments to FFH, and then FFH offset them against the loss-carryforwards, which gave the holdco an enormous shot of cash.

Was it legal?  The IRS said it was legal.  Was it ethical to pretend that you owned 80% of ORH when the reality was that the shares were borrowed?  Well, I'll leave that one for you to decide.

The moral of all of these stories is that Prem is very clever and very self-interested.
SJ

Stubble, thanks for the trip down memory lane... great summary of many things i had long forgotten (although i do still remember the day the ORH deal was announced... it was my biggest one day gain ever :-)

I just want to add that, even if this was a grey area, the tax consolidation move was both clever and appropriate. The context included a potential material write-down of tax assets, further credit downgrades and other subsequent reflexive and potentially firm-threatening spiral. One can question the way they obtained the IRS acquiescence but, for this specific 'deal', I came to the conclusion that this was the best and most appropriate course of action.
To tax consolidate without the economic interest is controversial but the intent of the transaction was a prelude to full consolidation. For those interested, the IRS continued to show discomfort with this type of transaction or perhaps that specific transaction:
https://www.irs.gov/pub/irs-utl/am2012007.pdf

---) Back to the Fairfax India issue

No, don't get me wrong here.  The tax consolidation of ORH was definitely legal -- the IRS made that clear.  Just as the $1B finite reinsurance contract from Swiss Re which was used to facilitate the TIG/C&F acquisitions was legal.  They were both ingenious, but some people held the view that it was playing a little fast and loose from an ethical perspective.  People are free to hold the view that they prefer.  My only observation is that Prem has a long history of making very clever moves for the financial benefit of FFH, and sometimes that can be perceived as a financial dis-benefit for the people who took the other side of the arrangement (the short-sellers of the past, ORH shareholders, Abitibi shareholders, and possibly Fairfax India unit holders).  It's not new.


SJ

[Xerxes]

Wasn’t able to catch it when it opened 22% down.
But caught it I think as 10% down. 

[Tompety03]

I am not intimately familiar with the cap structure at the Bangalore airport, but a 6-12 month slowdown in air travel should not impact the value of the airport this significantly. With 1/2 of the BV in the airport this seems like a bargain.

India seems to be taking a very proactive approach to the CV - my friend in Pune has been under social distancing measures for a week or so and has a very young population. Obviously there are other challenges discussed in the thread on India/CV.

Would be curious to hear other thoughts in case I am not missing anything.

Chris 

[obtuse_investor]

Of all the things I own right now, FIH certainly looks the cheapest right now.

If the book value growth is about 6-8% per annum for next 10 years, with current discount to book you can lock in a very healthy rate of return even after fees. Book should grow at a higher rate than that.