Fitch Ratings announced that it has placed the ratings of Toronto-based Fairfax Financial Holdings Limited and its rated subsidiaries and affiliates on Ratings Watch Negative. Fitch had previously assigned the ratings a negative outlook.
Fairfax issued a press release commenting on the action, which noted that, although it “maintains relationships with four major ratings agencies,” and provides them with additional information,” it “does not maintain a relationship with Fitch Ratings.” The company added that it had “not met with Fitch or provided information to Fitch since the spring of 2003 and since that time has requested Fitch to withdraw its ratings on Fairfax.”
As the rating agency’s rather lengthy bulletin shows, it has so far ignored the request. Fitch said it had taken the action because it has “concerns as to increasing liquidity pressures at Fairfax, as well as a continued decline in transparency of management’s public disclosures, which make it increasingly difficult for third parties to judge Fairfax’s creditworthiness.”
Fitch said it “intends to resolve its Rating Watch within several weeks, following additional analysis of publicly available information,” and “barring an increase in our comfort level, Fitch expects to downgrade and/or withdraw Fairfax’s ratings. A withdrawal will occur if Fitch determines that the company’s disclosures do not allow for a reasonable assessment of the financial health of Fairfax as a whole. This would relate primarily to the myriad of evolving intercompany transactions and ownership relationships, both on- and off-shore, as well as a lack of adequate disclosures regarding certain entities and transactions that could effect parent company liquidity.”
As a further explanation for its actions Fitch noted that while “Fairfax’s financial disclosures have become more voluminous over the years, Fitch has been concerned by an increasing lack of specific and readily available disclosures.”
Fitch cited the following as areas of “heightened concern:”
— an inability to reconcile second quarter holding company cash based on public disclosures;
— the complex series of transactions related to the Kingsmead run-off syndicates that appears to have been the catalyst for movement of the Advent collateral to Odyssey Re as provider;
— and a number of ownership changes and preferred stock issuances among significant subsidiaries, the rationale of which is unclear.
Fitch added that it “believes that Fairfax may have averted a liquidity squeeze in the second quarter of 2004 resulting from its need to support the collateralization of the Kingsmead run-off. “
Fitch also said it is “concerned that such a potential cash squeeze occurred after Fairfax’s operating subsidiaries had been experiencing their most favorable market conditions in years. Fitch believes that Fairfax requires a return to profitability and strong operating cash flows from its core operating subsidiaries to truly turn around its fortunes. However, many market observers have indicated a softening of rates has begun in Fairfax’s key markets.
“Finally, Fitch also remains concerned by the adequacy of Fairfax’s reserves for its growing runoff operations, uncertainty as to the true financial position of nSpire Re Limited and its abilities to perform on intercompany reinsurance transactions, the significant use of finite reinsurance within the organization, and Fairfax’s highly leveraged balance sheet and low levels of tangible equity.”
In its bulletin Fairfax stressed that it did meet with the four other rating agencies. Although it didn’t name them, they are presumably Standard & Poor’s, A.M. Best, Moody’s and Weiss, (since it doesn’t meet with Fitch). Fairfax explained that during those meetings it did provide the agencies with “all information necessary or requested by them in order to permit them to perform their ratings functions.” It added that such information “given by a company to ratings agencies necessarily involves a level of detail beyond its public disclosures which provide all material disclosure relating to the company’s results and financial state.”
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