Author Topic: Fairfax stock positions  (Read 41878 times)

StevieV

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Re: Fairfax stock positions
« Reply #120 on: July 22, 2020, 08:01:02 AM »
Basically a speculative investment.  $6 conversion in Nov. 2023 may turn out great.  Not that much above the current $4.80 and 3 years is a reasonable time.  Of course, may not work out at all.



StubbleJumper

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Re: Fairfax stock positions
« Reply #121 on: July 22, 2020, 10:38:38 AM »
Fairfax has agreed to roll it's Blackberry converts.

Current debentures @ 3.75% and $10 strike are being redeemed @ 101.6854.

Principal is being reduced slightly and rolled between Fairfax and one other institutional investor for new converts @ 1.75% coupon and a $6 strike for conversion.


Well, FFH received a valuable OTM option with the roll, but we'll see a reduction of US$10m per year of interest income.  If BB actually does turn the corner, that option could become quite valuable.  The fact that BB needed to have the coupon reduced is a bit of a concern, because it really does call into question their ability to write a US$535m cheque in November 2023.  I can't say that I am particularly surprised by this outcome, but I had hoped for somewhat more favourable terms.


SJ

petec

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Re: Fairfax stock positions
« Reply #122 on: July 23, 2020, 07:29:56 AM »
Fairfax has agreed to roll it's Blackberry converts.

Current debentures @ 3.75% and $10 strike are being redeemed @ 101.6854.

Principal is being reduced slightly and rolled between Fairfax and one other institutional investor for new converts @ 1.75% coupon and a $6 strike for conversion.


Well, FFH received a valuable OTM option with the roll, but we'll see a reduction of US$10m per year of interest income.  If BB actually does turn the corner, that option could become quite valuable.  The fact that BB needed to have the coupon reduced is a bit of a concern, because it really does call into question their ability to write a US$535m cheque in November 2023.  I can't say that I am particularly surprised by this outcome, but I had hoped for somewhat more favourable terms.


SJ

So did I, but doesn’t the change in rate just reflect the change in bond yields?
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StubbleJumper

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Re: Fairfax stock positions
« Reply #123 on: July 23, 2020, 08:46:35 AM »
Fairfax has agreed to roll it's Blackberry converts.

Current debentures @ 3.75% and $10 strike are being redeemed @ 101.6854.

Principal is being reduced slightly and rolled between Fairfax and one other institutional investor for new converts @ 1.75% coupon and a $6 strike for conversion.


Well, FFH received a valuable OTM option with the roll, but we'll see a reduction of US$10m per year of interest income.  If BB actually does turn the corner, that option could become quite valuable.  The fact that BB needed to have the coupon reduced is a bit of a concern, because it really does call into question their ability to write a US$535m cheque in November 2023.  I can't say that I am particularly surprised by this outcome, but I had hoped for somewhat more favourable terms.


SJ

So did I, but doesn’t the change in rate just reflect the change in bond yields?


Hi Pete,

Good to see you back in the forums, as I hadn't read even a peep from you for the past few weeks, and I was hoping that you were on vacation and not infected with covid!

I would argue that there is a couple of things that have occurred since the last time the debs were negotiated at 3.75%.  First, as you've noted, interest rates have broadly declined -- the risk-free rate for a US-dollar 3-year term has probably dropped about ~150 bps since the last time the debs were negotiated in Sept 2016.  But, in addition, I would argue that BB's company-specific risk has changed significantly, and a considerable risk premium needs to be demanded to recognize that there is clear potential that FFH will not get return of capital in November 2023.

Take a look at BB's financials the last time that the debs were negotiated back in 2016.  When BB published its financials in Feb 2017, it reported cash, short-term and long-term investments of $734, $644, $269m respectively, for a total cash/investment balance of $1,637m.  Effectively, BB did not really need the $605m proceeds from the debentures because it already had $1 billion of its own cash laying around.  If you look at previous years, you'll see that the healthy cash position was even healthier (ie, it was $2.5B in Feb 2016).  Despite the industry risks that BB faced, that large cash buffer considerably reduced the risk of FFH being unable to recuperate its capital -- or at least it did up until BB dropped $1B on Cylance.  Despite that cash buffer, BB had to pay 3.75% plus offer a US$10/sh conversion privilege because lending money to tech companies can be pretty risky.

Fast-forward to today.  It looks like ~$500m of the debentures are getting rolled, and the other ~$100m will be repaid.  So, where does BB stand?  As of May 31, BB had cash, short-term and long-term investments of $907m.  My understanding is that ~$100m of that is ear-marked to repay part of the debs, leaving a pro-forma cash balance of $807m, of which $300m is BB's cash and $500 is FFH's cash.  My arithmetic says that for the year ended Feb 2020, BB had cash from ops of $26m and it looks like they had capex of $44m (presumably this was maintenance capex because it was so small), resulting in a small cash burn.  The problem with rolling the debs is that, if BB burns cash for another three years, will it be in a position to write a $500m cheque in Nov 2023?  If everything goes well, the answer is yes.  But, a modest increase in the cash-burn or one small, dumb acquisition could leave BB short of cash in 2023.  In short, BB's qualitative risk has increased considerably over the past year, and IMO that requires a considerably larger risk premium.

Interestingly, despite the repricing of the conversion privilege, I am not convinced that the OTM option is more valuable today than it was in Sept 2016.  Back in Sept 2016, FFH negotiated a conversion price of US$10/sh and the prevailing stock price was US$8/sh, which would have ended in the money if the stock had climbed ~25% over the four-year term of the debs.  The roll of the debs is repricing the conversion to US$6/sh with a prevailing share price of ~US$4.80, which once again will require the shares to climb ~25% for the conversion to end in the money, but this time the term is only 3 years and 4 months (ie, July 2020 to Nov 2023).  Ignoring the possibility that the stock is undervalued or has higher volatility in 2020 (sigma), an argument could be made that the new conversion privilege is less valuable now than it was in Sept 2016.

Anyway, as I suggested, I'm not particularly surprised by this outcome, but I had hoped for slightly more favourable terms.


SJ

Xerxes

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Re: Fairfax stock positions
« Reply #124 on: July 23, 2020, 03:29:10 PM »
It could also be said FFH has effectively re-priced the cost basis of its all-in stake (Deb and commons) on BB. Thereby tilting the position into a more all-or-nothing and with the lower blended cost basis on both debs and commons it would be much easier for it to give up its stake in potential acquisition by a third party.