Canadian Underwriter

Fairfax downgrade leads to stock drop

February 12, 2003   by Canadian Underwriter

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Following a tumultuous trading binge last month, Toronto-based Fairfax Financial Holdings Ltd. (TSX, NYSE: FFH) was hit by another volley today following a ratings downgrade from Standard & Poor’s. Yesterday, the stock flew up to top $110 per share after the company reported record profits for 2002. But on news of the S&P downgrade, the stock dropped 8.25% by mid-day Wednesday.
S&P lowered its counterparty credit rating on Fairfax to “BB” from “BB+”, “because of concerns about Fairfax’s ability to maintain adequate liquidity”. S&P also lowered the rating on Fairfax subsidiary TIG Holdings Inc. to “BB-” from “BB”. Both ratings were placed on negative watch.
S&P notes that despite improved underwriting results last year, it takes a negative view of the company’s decision to use the parent holding company’s resources to repay $207 million in RHINOS (redeemable hybrid income overnight shares) maturing on February 24 of this year. Given that the holding company already faces more than $400 million in maturing obligations, the impact on its liquidity is of concern, particularly given Fairfax’s limited access to capital markets.
The company reports dividend capacity of $670 million, largely related to ORC Re and offshore operations, but S&P believes Fairfax will have limited access to this capacity in light of the capital considerations of those operations.
The news is especially troubling for Fairfax, which faced a significant drop in stock price last month following release of an analyst’s report calling the company’s reserve position into question. The company began the year at a high of $121 per share.

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