FFH.PR.I To Reset At 3.708%; Potential Conversion to FFH.PR.J

Fairfax Financial Holdings Limited has announced:

that it has determined the fixed dividend rate on its Cumulative 5-Year Rate Reset Preferred Shares, Series I (“Series I Shares”) (TSX:FFH.PR.I) for the five years commencing January 1, 2016 and ending December 31, 2020 . The fixed quarterly dividends on the Series I Shares during that period, if and when declared, will be paid at an annual rate of 3.708% (Cdn. $0.23175 per share per quarter).

Holders of Series I Shares have the right, at their option, exercisable not later than 5:00pm ( Toronto time) on December 16, 2015 , to convert all or part of their Series I Shares, on a one-for-one basis, into Cumulative Floating Rate Preferred Shares, Series J (the “Series J Shares”), effective December 31, 2015 . The quarterly floating rate dividends on the Series J Shares will be paid at an annual rate, calculated for each quarter, of 2.85% over the annual yield on three month Government of Canada treasury bills. The actual quarterly dividend rate in respect of the January 1, 2016 to March 30, 2016 dividend period for the Series J Shares will be 0.82587% (3.34936% on an annualized basis) and the dividend for such dividend period, if and when declared, will be Cdn. $0.20647 per share, payable on March 30, 2016 .

Holders of Series I Shares are not required to elect to convert all or any part of their Series I Shares into Series J Shares.

As provided in the share conditions of the Series I Shares, (i) if Fairfax determines that there would be fewer than 1,000,000 Series I Shares outstanding after December 31, 2015 , all remaining Series I Shares will be automatically converted into Series J Shares on a one-for-one basis effective December 31, 2015 ; and (ii) if Fairfax determines that there would be fewer than 1,000,000 Series J Shares outstanding after December 31, 2015 , no Series I Shares will be permitted to be converted into Series J Shares. There are currently 12,000,000 Series I Shares outstanding.

The Toronto Stock Exchange (“TSX”) has conditionally approved the listing of the Series J Shares effective upon conversion. Listing of the Series J Shares is subject to Fairfax fulfilling all the listing requirements of the TSX and, upon approval, the Series J Shares will be listed on the TSX under the trading symbol “FFH.PR.J”.

The extension of FFH.PR.I is not a surprise, given that it’s trading at about 13.00.

FFH.PR.I commenced trading 2010-10-5 as a FixedReset, 5.00%+285, after being announced 2010-9-27. The issue was not only upsized shortly after the announcement, but the greenshoe was fully exercised.

The new rate of 3.708% is therefore a dividend reduction of about 26%.

As noted in the release, the deadline for notifying the company of a desire to convert to FFH.PR.J is 5:00 p.m. (EST) on December 16, 2015, (a Wednesday) but brokerages will normally have an internal deadline a day or two prior to that. If you miss the brokerage deadline, they’ll probably submit the request for you if you grovel, but if you miss the company deadline, that’s it.

At this point, market conditions are such that I expect FFH.PR.J to trade significantly below FFH.PR.I. FFH.PR.I closed today at a bid of 16.60 and the average implied 3-month bill rate of other junk issues is -0.48%. Assuming this relationship holds, the estimated trading price for the FFH.PR.J is 15.28, about 8% lower. Rather than convert and thereby get 1.00 shares of the FFH.PR.J, it seems likely (but by no means guaranteed!) that it will be better to execute trades in the marketplace after FFH.PR.J commences trading and thereby get (maybe!) 1.09 shares of the new FFH.PR.J.

So, I expect to recommend that holders of GWO.PR.N hang on to them, but I will make a formal recommendation on December 11, just in time for PrefLetter.

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