What are the potential risks associated with the senior notes, such as call features or covenant restrictions?

Key risks to watch for with Fairfax’s C$700 million senior notes

1. Call‑feature risk – Many senior‑note programs include a make‑whole or “early‑redemption” provision that allows the issuer to buy the notes back before maturity when interest‑rate environments fall or cash‑flow conditions improve. If Fairfax exercises a call, investors are forced to reinvest the proceeds at a potentially lower yield, compressing total return. The call price is usually set at a premium to par, but the premium narrows as the call date approaches, so the effective yield‑to‑call can be materially lower than the original coupon. Traders should monitor any “call‑date” announcements and price the notes with a yield‑to‑call spread to comparable non‑callable securities.

2. Covenant‑restriction risk – Senior notes are typically subject to financial covenants (e.g., leverage ratios, minimum cash‑flow coverage, or restrictions on additional debt issuances). A breach—whether from a deteriorating credit profile, a large acquisition, or a swing‑in‑cash‑flow volatility—can trigger a default event, forcing the notes into a “restricted” status. In such a scenario, the market may price the notes at a steep discount, and the liquidity of the secondary market can evaporate. Pay close attention to Fairfax’s disclosed covenant matrix and any recent changes in its balance‑sheet metrics (e.g., debt‑to‑EBITDA, liquidity ratios) that could tighten or relax these covenants.

3. Credit‑ and liquidity‑risk overlay – Even absent a call or covenant breach, senior notes carry the standard credit risk of the issuer. Fairfax’s credit rating, sector exposure, and macro‑economic outlook (especially Canadian interest‑rate moves) will shape the spread over Treasuries. Because the offering is not intended for U.S. distribution, cross‑border investors may face additional settlement‑or‑tax complexities that can further thin trading volume. A widening spread or a downgrade would amplify the price sensitivity of the notes, making them more volatile than comparable senior unsecured bonds.

Trading implications

• Position sizing: Limit exposure to a modest portion of the portfolio until the call schedule and covenant terms are fully mapped; use stop‑losses to guard against covenant‑triggered price drops.
• Yield‑curve positioning: If you anticipate a call, consider a “laddered” approach—hold a portion of the notes and simultaneously position in shorter‑dated, non‑callable securities to preserve carry.
• Credit monitoring: Set alerts for any rating actions or covenant‑testing events in Fairfax’s quarterly filings. A breach or downgrade could present a short‑opportunity or a defensive exit signal.

By tracking the call dates, covenant thresholds, and Fairfax’s credit health, you can better manage the upside‑capture versus downside‑protection trade‑off inherent in this senior‑note issuance.