DBRS Comments on Increased Fairfax Tender Offer and Issue of Senior Notes

DBRS has reviewed Fairfax Financial Holdings Limited’s (Fairfax) issue of Senior Notes which is being used primarily to finance its previously announced offer and subsequent increased offer to purchase outstanding notes of Fairfax and its wholly-owned subsidiaries Odyssey Re Holdings Corp. (OdysseyRe) and Crum & Forster Holdings Corp. (Crum & Forster). The current DBRS ratings for the senior debt and preferred share obligations of Fairfax remain at BBB and Pfd-3 with Stable trends, respectively.

On May 4, 2011, Fairfax announced that it was going to refinance approximately $500 million of bonds, a portion of which was issued by wholly-owned subsidiaries. Notwithstanding a slight increase in double leverage, DBRS was supportive due to the extended maturity of the replacement debt and expected annual interest expense savings. On May 20, 2011, Fairfax increased the aggregate tender offer to $691,233,000 from $510,600,000 due to greater demand than had been originally anticipated.

To finance the increased tender offer, Fairfax has recently issued CAD 400 million of Senior Notes. This issue is in addition to the $500 million issued on May 4, 2011, as part of the initial tender offer. The proceeds will be used primarily to repurchase the notes to complete the increased tender offer. The balance is to be retained at the holding company level or used to retire outstanding debt and other corporate obligations.

DBRS estimates that this transaction will increase the debt-to-capitalization of Fairfax to 27.4% from 25.5% as at March 31, 2011. However, Fairfax’s interest coverage and fixed charge coverage will be mostly unchanged as the coupon on the increased debt will largely offset the savings from the refinancing. DBRS notes that Fairfax’s debt ratios have increased over the past few quarters although the Company’s debt ratios remain below the peak levels of several years ago. Fairfax will continue to have close to $1 billion in cash on hand at the holding company to fund any contingent obligations and opportunities. In spite of the additional increase in double leverage and the increasing debt ratios, DBRS is maintaining its ratings of the senior debt and preferred share obligations of Fairfax at BBB and Pfd-3 with Stable trends, respectively.

In addition, DBRS notes that Fairfax had a challenging Q1 2011 as it recorded catastrophe losses of $311 million for the Japan earthquake/tsunami, $48 million for the New Zealand earthquakes and $25 million for the flooding in Australia. These results are a reminder of the inherent earnings volatility expected in the property and casualty insurance industry which limits improvements in credit ratings.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Canadian Property and Casualty Insurance Companies.