Fairfax stock positions

[Gregmal]

I just dont get what the point is of owning a shitco if you dont have an exit strategy. And I say this as someone who is all for flipping the worthless or overvalued sardine to a higher bidder. But buying these type of things and then locking into a long term illiquidity issue just seems hard to understand. I mean we might not expert FFH to pull off clever moves like Mudrick did the other day, but expecting some sort of exit lever to get pulled isnt crazy, is it?

[StubbleJumper]

36 minutes ago, Parsad said:

Incidentally, Fairfax doesn't have to monetize their BB position.  I think it would be equally beneficial if BB did something similar to AMC and did a at the market equity raise as well.  BB raising $1-2B at these prices would be as good as FFH selling or monetizing their BB investment.  Cheers!

 

It kind of depends on what you believe BB is actually worth.  If you believe that all of BB's future cashflows discounted back to today are only worth US$4 billion or US$5 billion, then today's market cap of US$9 billion is a screaming sell.  Without a doubt it would be a beneficial thing for existing BB shareholders if management sold another 100 million or 150 million shares to a bunch of inexperienced kiddies at 2x fair value, but even in that case it would be far better for FFH to sell its shares at 2x fair value than to hold them and benefit from the minor value improvement from BB having picked some kiddies' pockets.

If the BB share price holds above US$15 after the blackout period, there's no excuse if FFH doesn't sell, unless FFH actually comes out and states that they truly believe the POS is actually worth US$9B.

 

SJ

[FairFacts]

Just a thought, I have no direct knowledge of anything like this....

Could Fairfax have entered into an automatic sale plan with a broker with respect to its BB holdings in order to avoid any blackout restrictions under certain circumstances (such as a Reddit-fed frenzy). As part of its annual announcements Fairfax has in the past used an automatic share purchase plan of its own stock during the restricted period.

a hopeful thought, maybe?

[Xerxes]

Not sure how long is the blackout period and/if suppose to be a month long. Last year's Q1 results were released on June 24th. Assuming same date for this year, that is very long blackout.

Seems to be odd that insiders cannot trade the stock for full 4 month in a given year.

 

[SharperDingaan]

The expectation that FFH must sell its underlying positions in a sh1te coy (BB, RFP, etc), is a little ridiculous. Nothing prevents FFH from using derivatives to lend out/repo the beneficial interest from time to time - it is really no different to writing a covered call. However, in the garbage collection business, there is a lot to be said for ALSO owning enough of sh!te co to warrant a voice at the table.

The end game is always consolidation into a small piece of a much larger and more robust pie. Buy the sh1te at cents, roll it into the bigger entity at dollars, and if it takes forever - it really doesn't matter. The sh1te just has to NOT bankrupt, while you temporarily carry it at a net zero cashflow, and progessively refinance with growing amounts of interest free defered tax (the tax saved until there is eventually a sale).

No different to an individual buying enough shares of a sh1te coy - that ultimately pay for a mansion, if/when the turd turns into diamonds  Same approach, different application.  

FFH just dances to a different drummer. Great for diversification purposes, but for trading ... not so much.

SD

Edited June 3, 2021 by SharperDingaan

[SharperDingaan]

Deferred tax thing ...

In Canada, an individual currently pays tax on 50% of their gain; to simplify, assume a 50% tax rate. If you bought XYZ at CAD 10/share and sold for CAD 50/share, you would owe CAD 10/share in tax [(50-10)*.5*.5). Invert this - and you quickly realise that the CAD 10/share tax saved by NOT selling, is now financing your CAD 10 purchase at an interest rate of 0%. God bless our tax system!

However, you need a 5 bagger+. Sh1te coys, that were ideally just fallen 'angels' covered in mud! 

SD

 

 

Edited June 4, 2021 by SharperDingaan

[Xerxes]

SD, 

Can you elaborate on the bolden part a bit more, i lost it when i got to that part. Are you saying => it is good not to realize gain in a non-registered account as far as you can (by holding) vs. realizing gain and paying the taxman, if you have more/or/less than 5 bagger. I guess it depends all long term rate of return vs. alternative.

Not sure I follow ... i am not bright on Fridays

"In Canada, an individual currently pays tax on 50% of their gain; to simplify, assume a 50% tax rate. If you bought XYZ at CAD 10/share and sold for CAD 50/share, you would owe CAD 10/share in tax [(50-10)*.5*.5). Invert this - and you quickly realise that the CAD 10/share tax saved by NOT selling, is now financing your CAD 10 purchase at an interest rate of 0%. God bless our tax system!

However, you need a 5 bagger+. Sh1te coys, that were ideally just fallen 'angels' covered in mud!"

[Crip1]

18 hours ago, SharperDingaan said:

Nothing prevents FFH from using derivatives to lend out/repo the beneficial interest from time to time - it is really no different to writing a covered call. However, in the garbage collection business, there is a lot to be said for ALSO owning enough of sh!te co to warrant a voice at the table.

 

SD

SD,

Is there sufficient market out there for FFH to do this with a meaningful portion of their BB holdings? Just wondering whether there's a collection of counterparties ready, willing and able to do so.

-Crip

[SharperDingaan]

57 minutes ago, Xerxes said:

SD, 

Can you elaborate on the bolden part a bit more, i lost it when i got to that part. Are you saying => it is good not to realize gain in a non-registered account as far as you can (by holding) vs. realizing gain and paying the taxman, if you have more/or/less than 5 bagger. I guess it depends all long term rate of return vs. alternative.

Not sure I follow ... i am not bright on Fridays

"In Canada, an individual currently pays tax on 50% of their gain; to simplify, assume a 50% tax rate. If you bought XYZ at CAD 10/share and sold for CAD 50/share, you would owe CAD 10/share in tax [(50-10)*.5*.5). Invert this - and you quickly realise that the CAD 10/share tax saved by NOT selling, is now financing your CAD 10 purchase at an interest rate of 0%. God bless our tax system!

However, you need a 5 bagger+. Sh1te coys, that were ideally just fallen 'angels' covered in mud!"

 

Simplify. Assume 100 shares purchased with 100% cash. Assets = 1000 (shares), Equity = 1000. Sell at 50, and you will receive 4000 after tax. Expressed at the gross level as Asset =5000, Liability = 1000, Equity = 4000.

What happened in substance? Your 1000 of equity at inception, got replaced with 1000 of deferred tax liability, leaving you with the 4000 of equity as expected. You have the tax liability because it is money that you will owe when you sell – but until then it is an interest free loan. Your initial equity financing was ‘re-financed’ with the money you will owe in taxes when you sell. Very WEB, and something only an accountant could love 

SD

[SharperDingaan]

As long as there is more demand than supply, the price of the share will rise. There is probably quite the market for short-term 'rentals', that are leveragable, and one-month either side of an earnings release. It also allows insiders not to violate black-outs - the trades do not need to be disclosed, or even reported on.

If you sold the beneficial interest, but are obliged to buy it back, you haven't actually sold. You've simply lent the interest out, same as you would had this been a plain vanilla sale and repurchase agreement.

SD

 

Edited June 4, 2021 by SharperDingaan

[Xerxes]

4 hours ago, SharperDingaan said:

 

Simplify. Assume 100 shares purchased with 100% cash. Assets = 1000 (shares), Equity = 1000. Sell at 50, and you will receive 4000 after tax. Expressed at the gross level as Asset =5000, Liability = 1000, Equity = 4000.

What happened in substance? Your 1000 of equity at inception, got replaced with 1000 of deferred tax liability, leaving you with the 4000 of equity as expected. You have the tax liability because it is money that you will owe when you sell – but until then it is an interest free loan. Your initial equity financing was ‘re-financed’ with the money you will owe in taxes when you sell. Very WEB, and something only an accountant could love 

SD

ok but I see it more as building leverage as you compound that initial seed money, with that leverage always being equal to 25% of the unrealized gain (i.e. yr tax rate on capital gain).

Same example, if you sell at 80, so 8,000 on the asset side, that means 2,000 deferred tax liability + the rest ($6,000) being equity; with the deferred tax liability now being 2x my initial seed money. That is all well and good, but how is knowing that is going to help me retire early or stop government from picking my pockets, in a more practical sense. 

On a different note, I guess adding to the winners (i.e. raising average cost) is one way to lower tax, but maybe not, need to do the math.

[SharperDingaan]

The investor has to accept that their initial investment (1000) is locked in until they sell - thereafter, it helps with RESIDUAL position sizing. If you sold 50 shares at 20, you would only have 50 shares left to benefit from future appreciation. But if you can hold off until the share price is > 50 .... you can essentially retain the original 100 indefinitely.

 

So what? Imagine this was 4000 shares at 0.25 (still $1000) - you buy 100,000 for 25K. As/when it gets to 1.25 (5x, 125K value), it also becomes a company with far better prospects (ie: o/g 'fallen angel'  at the bottom of a change in the commodity cycle), and still further appreciation. You still have your full 100,000 shares, and continue to benefit from the risk taken when you bought it at .25

 

The gods bless you, the price goes to 10, you walk away with 1M ... but you need a unicorn, and have to remain exposed. As they don't show up too often, you want as many shares exposed as possible 

 

SD   

Edited June 7, 2021 by SharperDingaan

[Phoenix01]

If FFH disposed of shares on the Thursday price spike, by when would they normally have to declare it publicly?

[Xerxes]

Amazingly BB has been holding up for almost a week now. LOL... This is unlike the short-term price spike in January.

 

[petec]

Separately, Quess stock is regaining its mojo. 

[Viking]

Resolute just announced a $1/share special dividend. Fairfax owns 24.8 million shares = CAN $24.8 million. Stelco could also do the same thing (large one time dividend). This will help Fairfax grow interest and dividend income in 2021. 
 

Will Fairfax record the dividend in Q2 or Q3? The record date is June 28. Payment is July 7.

 

Pretty rational and balanced use of cash by Resolute:

1.) invest additional $50 million in very profitable part of business (sawmills)

2.) pay down $180 million in debt

3.) $1 special dividend ($79 million)

 

And the earnings from lumber looks poised to stay strong (as long as US housing starts stay strong).

——————————

MONTRÉAL, June 10, 2021 /CNW Telbec/ - Resolute Forest Products Inc. (NYSE: RFP) (TSX: RFP) today declared a special cash dividend of $1.00 per share of common stock, payable on July 7 for holders of record at the close of business on June 28. The company also announced additional capital investments of $50 million in its wood products operations to support its continued growth, and it confirmed the repayment of all amounts outstanding under its revolving and term credit facilities, reducing debt by $180 million in the second quarter.

 

- https://resolutefp.mediaroom.com/2021-06-10-Resolute-Announces-1-share-Special-Dividend-and-50-million-in-Lumber-Investments

 

Edited June 11, 2021 by Viking

[petec]

3 hours ago, Viking said:

Fairfax owns 24.8 million shares

How certain are we about this? Bloomberg still says 30.55 million. 

[barminov]

14 minutes ago, petec said:

How certain are we about this? Bloomberg still says 30.55 million. 

 

30,548,190 shares

https://www.sec.gov/Archives/edgar/data/915191/000110465921066266/xslForm13F_X01/a21-15594_3informationtable.xml

The incorrect number is listed in the AR because of the RiverStone transaction. 

 

Also, the dividend is in US $. 

[petec]

15 minutes ago, barminov said:

 

30,548,190 shares

https://www.sec.gov/Archives/edgar/data/915191/000110465921066266/xslForm13F_X01/a21-15594_3informationtable.xml

The incorrect number is listed in the AR because of the RiverStone transaction. 

 

Also, the dividend is in US $. 

Hopefully the price they pay to repo shares from CVC is reduced by dividends paid. 

[Viking]

Thanks for the corrections. I struggle with what share count to use for Fairfax’s various equity holdings. I do not understand the Riverstone transaction, what equities are included, and what the exact share numbers are. I decided to use the numbers Fairfax provided in the AR. Hopefully in 2021 Fairfax gets the Riverstone sale done and is able to repurchase the equity holdings and report shares owed in a more transparent way

 

Bottom line, interest and dividend income is growing nicely.

[StubbleJumper]

I'm not sure that I would say that interest and dividend income is "growing."  Unfortunately, FFH will continue to roll over a considerable portion of its treasury bonds into lower interest rates during 2021 and the interest element looks to be shrinking.  Interest and divvies were lower by US$50m in Q1 compared to the same quarter last year.  If you are brave enough to run-rate that for an entire year, that's a hole of ~US$200m.  At least a special dividend of US$25m or US$30m from Resolute and something similar from Stelco will help fill that hole a bit.  Thankfully, underwriting looks promising and investment gains might be very large during 2021.

 

 

SJ

[Viking]

Stubble, i agree with what you are saying. I was too lazy with my comment. In 2020 Fairfax’s equity holdings (lots of cyclicals) cratered in price as profits took a big hit. This reduced the amount of dividend income Fairfax received. In 2021 the profitability of Fairfax’s equity holdings has greatly improved. My point is this should result in Fairfax receiving more dividend income year over year. Stelco re-instating their dividend and RFP with their special dividend are two examples. It would not surprise me to see something from Recipe late in 2021 or early 2022 if restaurant sales in Canada spike in the summer and fall. I see dividend income as a small tailwind for Fairfax in 2021 and 2022 versus a headwind in 2020. 
 

PS: good discussion on the Resolute thread about how the one time dividend will actually impact Fairfax from an accounting perspective....

Edited June 11, 2021 by Viking

[petec]

Atlas has just renegotiated the $600m of Fairfax debt into $300m of debt and $300m of prefs

• The debt remains at 5.5% and matures in 2025 and 2026. Fairfax's mandatory redemption and put rights are eliminated and, as I read it, removes any collateral requirements.
• The prefs are at 7% for 5 years and then rise 1.5% a year until they reach 11.5%.
• The deal also comes with 1m warrants for Fairfax exercisable at $13.71.

I think the rate on the prefs is an interesting insight into the Fairfax team's thinking on inflation. I also guess that Atlas expects to be able to repay those prefs before the rate steps up, using the cash from their newbuild deliveries.

 

[StubbleJumper]

36 minutes ago, petec said:

Atlas has just renegotiated the $600m of Fairfax debt into $300m of debt and $300m of prefs

• The debt remains at 5.5% and matures in 2025 and 2026. Fairfax's mandatory redemption and put rights are eliminated and, as I read it, removes any collateral requirements.
• The prefs are at 7% for 5 years and then rise 1.5% a year until they reach 11.5%.
• The deal also comes with 1m warrants for Fairfax exercisable at $13.71.

I think the rate on the prefs is an interesting insight into the Fairfax team's thinking on inflation. I also guess that Atlas expects to be able to repay those prefs before the rate steps up, using the cash from their newbuild deliveries.

 

 

So, in rough terms, this is accretive to FFH by about $6.5m/year, pre-tax?  For the prefs it's an incremental 1.5% x $300m= $4.5m/year.  And for the warrants, we expect Atco's stock price to increase by an average of about $2/year for the foreseeable future, so that's ~$2 x 1m= $2m/year.  And in return, FFH has moved down the creditor pecking order?

 

Okay, that's not too bad for one day of work.

 

 

SJ

[petec]

3 minutes ago, StubbleJumper said:

 

So, in rough terms, this is accretive to FFH by about $6.5m/year, pre-tax?  For the prefs it's an incremental 1.5% x $300m= $4.5m/year.  And for the warrants, we expect Atco's stock price to increase by an average of about $2/year for the foreseeable future, so that's ~$2 x 1m= $2m/year.  And in return, FFH has moved down the creditor pecking order?

 

Okay, that's not too bad for one day of work.

 

 

SJ

Sounds about right to me.