Author Topic: Fairfax stock positions  (Read 30315 times)

Xerxes

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Re: Fairfax stock positions
« Reply #80 on: March 17, 2020, 11:18:05 AM »
Not to pile on Prem W. as I respect the man.

But I would just note that in his annual letter he made a comment about high fliers tech companies and how expensive they are. Yet, the NASDAQ leadership “I.e FANGS” although down are no where near down as value is. 


steph

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Re: Fairfax stock positions
« Reply #81 on: March 17, 2020, 01:27:03 PM »
How far can the equity positions go down, before FFH is in danger?


Your question might require a bit more explanation.  There are a number of potentially bad/dangerous outcomes of a collapse in equity prices:

1) Reduced underwriting capacity in the subs: if equities are held in the insurance subs, lower equity prices are marked to market and that increases the premiums:statutory capital ratio.  This would fall under the category of a "bad" outcome rather than dangerous.

2) Line of credit covenants: FFH holdco and several of the subs maintain lines of credit, some of which are partially drawn.  Each of those revolvers likely has a lengthy list of covenants.  The holdco covenants require a maximum debt:capital ratio and a minimum shareholders equity total.  My rough math suggests that FFH holdco could take about a $5b haircut on its equity before violating its covenants, but what are the other covenants that have not been disclosed?  What covenants are present in the subs' revolvers?  It would be highly inconvenient if the credit lines were pulled...this might be a "dangerous" outcome.

3) Bond/notes indentures: FFH and the subs have floated dozens of debt instruments, all of which have indentures.  Presumable these are far less restrictive than the credit line covenants?  Do falling equity prices constitute a risk?  This might be a "dangerous" outcome, but from the outside it's hard to estimate the risk.

4) Management fees: one of the ways that the holdco finances its operations is through management fees related to Fairfax India, Africa, and Hamblin Watsa's management of the subs' portfolios.  A smaller portfolio means smaller management fees, and perhaps a cashflow challenge for the holdco.  This would probably be a "bad" outcome but not dangerous.

5) Refinancing risk: either by good management or by good luck, FFH holdco doesn't have any bullet maturities during 2020.  However, holdco must continuously float new debt to replace maturing debt, with about US$300m needing to be refinanced by May 2021.  A collapse in the equity portfolio would not be helpful for credit availability or terms.  Similarly, if the need to issue shares arises, it is virtually certain that the price that FFH could obtain for a share issuance would be considerably lower after a collapse of the equity portfolio.  This is merely "bad" rather than dangerous.



At this point, I'd say that equity prices are not really a "danger" for FFH, but they do constitute yet one more trip to the woodshed for shareholders.



SJ


Thank you for this very complete answer. Very interesting!