If Warren Buffett had a little brother, his name would be Prem Watsa. Watsa runs Canadian insurance conglomerate Fairfax Financial (FFH.TO, FRFHF) very similarly to the way Buffett runs Berkshire Hathaway (BRK.A, BRK.B). The bonds of Fairfax (Cusip 303901ag7) are a low-risk investment, yielding 3.6%, maturing on April 15, 2018.
According to the Third Quarter Report, Fairfax has $34.3 billion in assets (minus goodwill) and $25 billion in liabilities. Only $3.2 billion of that is long-term debt. Well enough to cover its debt payments. So why are these investment grade (BBB) bonds with a maturity of less than 4 1/2 years yielding so much? Probably because American bond investors are unfamiliar with Fairfax. Fortunately for us value folks, it is definitely on our radar screen.
According to Watsa's Annual Shareholders' Letter, book value has compounded at 23% since 1985. Wow! This recent article on Seeking Alpha takes a much more in depth look at Fairfax. In Watsa's 2012 Letter, "At the end of 2012, we had approximately $784 per share in float. Together with our book value of $378 per share and $127 per share in net debt, you have approximately $1,289 in investments per share working for your long term benefit." At a market value of $385, that leaves quite a bit of security for bond holders.
Fairfield's 2018s are beating the heck out of risk free bonds by over 200 basis points. According to many experts, interest rates will be low for quite some time. A recent article in the Wall Street Journal notes that the Fed's tapering is likely to run out of steam and leave interest rates low. To mitigate risk, Bill Gross of Pimco is recommending maturities in the three to five year range. These bonds would meet Gross' criteria.
Of course, yields could rise and the value of this bond could drop. So what? As long as you hold to maturity, five years isn't that long. Comparable maturities are paying a lot less. AT&T (NYSE:T) has a series maturing 5/15/18 that barely yield over 2%. A series from Boeing (NYSE:BA) with the same maturity date barely yield over 1.5%.
So what do you get by purchasing these bonds? A nice yield, investment grade quality, and Prem Watsa. These bonds beat comparable issues by quite a margin.
Disclosure: I am long OTCQB:OTCPK:FRFHF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: We are long Fairfax bonds.