Sep. 10, 2009 (Business Wire) -- Fairfax Financial Holdings Limited's (Fairfax) recently announced proposal to acquire the remaining 27.4% of Odyssey Re Holdings Corp. (Odyssey Re) it doesn't currently own does not affect ratings on Fairfax or any of its subsidiaries, according to Fitch Ratings.
This proposed acquisition is consistent with Fitch's view of Fairfax as a 'true' holding company acquiring and overseeing subsidiary insurance and reinsurance companies under a decentralized management approach. The cash consideration of $60 per share represents an almost 20% premium over the closing price when Fairfax announced the proposed transaction on Sept. 4, 2009, and will be funded with a $1 billion equity offering under its existing shelf prospectus. Odyssey Re has been a public company since Fairfax sold a 26% stake in 2001 via an initial public offering (IPO). The proposed acquisition follows Fairfax's purchase in early 2009 of the 36.4% of Northbridge Financial Corp. (Northbridge) it did not already own for $546 million, which was funded from holding company cash.
Fitch's ratings of Fairfax are based on its role as a 'functioning' parent holding company with varied subsidiary profiles and a highly complex cash flow profile. Fitch's ratings of Fairfax's three core operating businesses - primary U.S. insurance operations through Crum & Forster, Canadian insurance operations through Northbridge and reinsurance operations through Odyssey Re - are rated at stand-alone levels currently, with no enhancement or detriment from the parent company. However, with all three core operating businesses returning to being wholly owned subsidiaries of the company, Fitch may consider a more group rating approach over time. Going forward, Fairfax should also benefit from increased upstream dividend capacity through its 100% owned operating subsidiaries. This follows a period where Fairfax needed the financial flexibility to raise cash from partial IPOs of both Odyssey Re and Northbridge.
Fairfax's debt-to-total-capital ratio is down to about 22.5% on June 30, 2009, compared with 23.4% on Dec. 31, 2008. Following the company's recent CAN$400 million debt issuance in August and expected $1 billion equity issuance, pro forma debt-to-total-capital on June 30, 2009 increases only slightly and remains below Fitch's expected range of 25%-30%. Earnings-based interest coverage (excluding realized gains) improved to 3.6 times (x) in the first six months of 2009 from negative coverage in 2008. Fairfax also continues to maintain a sizable amount of holding company cash, short-term investments and marketable securities of $880 million on June 30, 2009, and expects to have in excess of $1 billion following completion of the proposed acquisition of Odyssey Re and expected equity issuance.
