Bears continue to maul Fairfax
Long-time Fairfax bears, analysts John Gwynn and Matthew Cantrell of Morgan Keegan, have again mauled the company in their latest research notes.
In two recent notes the analysts raise a number of points that will make uncomfortable reading for the company (see story above), including the continuing efforts to re-leverage debt and issues with run-off, which form the background to the lawsuit.
In a note dated 17 April the analysts said: “Fairfax’s repeatedly proclaimed ‘deleveraging’ program appears to have stalled during 2005, with debt-to-equity having increased to 98.1 percent at year end 2005, up from 89.4 percent at the 2004 year-end.
“The hyper-leverage in place at Fairfax should draw increasing attention from bond holders, ratings agencies and other interested parties over the course of 2006, due to expected liquidity stress at the holding company.”
In a separate research note dated 12 April, Gwynn analyses a solvent scheme of arrangement Fairfax is proposing for the run-off liabilities of one of its European operations.
The note said: “We believe the ‘solvent scheme of arrangement’ in regard to a portion of Fairfax’s European runoff liabilities will be an additive burden to the company’s previously disclosed cash funding needs for this operation of $150-$200mn during 2006.
“One significant potential creditor to the scheme, General Re, was excluded from the filed scheme, presumably due to its opposition to the scheme and, due to the magnitude of its claims, its ability to block necessary creditor approval.”
The note concludes: “In our opinion, investors should be prepared for yet another year of unexpectedly large runoff losses and negative cash flows, in part occasioned by the results of this scheme of arrangement.”
Both research notes rated Fairfax’s shares to Underperform.