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Shareholders attend the Fairfax Financial Holdings annual general meeting in Toronto on Wednesday, April 9, 2014.Nathan Denette/The Canadian Press

Fairfax Financial Holdings Ltd.'s latest financing didn't sell as planned, forcing the underwriters to absorb millions of dollars in potential losses from unsold shares.

The $735-million financing was sold by way of a bought deal, which means the underwriters paid Fairfax the money up front and absorbed the risk of re-selling the shares to the market. Many investors balked at the terms, with only about 50 per cent of the transaction sold, according to people familiar with it, so advisers are currently holding the remaining portion. The deal was originally priced at $735 a share, a 3.9-per-cent discount to the market price. Fairfax's shares currently trade for $709 apiece, having fallen 7 per cent since the deal was announced.

At the moment, the underwriters are collectively breaking even on the deal – after accounting for the 4-per-cent, or $29-million, commission, they earn. However, they are expected to launch what is known as a "clean-up" trade, in which the unsold shares will be unloaded at a bigger discount. Depending on this final price, there is a chance the underwriters eke out a small profit on the deal – but they could also be on the hook for millions of dollars.

Because the deal closed Wednesday, underwriters had to give Fairfax its money, which means they are currently out the value of the unsold shares. That isn't so much of a problem for the big banks involved, because they have massive balance sheets. But it is unfortunate for the independent dealers in the syndicate – Cormark Securities, Canaccord Financial and GMP Securities – who would greatly benefit from the fees.

The Fairfax transaction is an outlier in a string of recent financings. Investor demand for resource share sales roared back in February, helping Enbridge Inc. raise $2.3-billion – delivering the underwriters $80.5-million in fees. It's worked out well for the investors, too, who are currently up 15 per cent since the financing.

Gold deals are also selling, notably a financing from Franco-Nevada Corp. to help fund an acquisition. The company initially set out to raise $500-million (U.S.) but ultimately increased the deal size to $920-million due to massive demand.

Financings struggle to sell from time to time – sometimes because they aren't priced correctly or due to investor worries about things like market volatility. In the past year, a number of major deals have struggled to drum up adequate demand.

Last April, Silver Wheaton Corp. launched an $800-million share offering to help finance the acquisition of a gold stream from Vale SA. The deal didn't sell well, and the underwriters ultimately lost millions of dollars.

Two months later, in June, underwriters had to completely reprice a $998-million (Canadian) stock offering from Tahoe Resources Inc. – meaning the deal terms were rewritten – in order to get it to sell.

Fairfax launched its deal with its stock trading near an all-time high of $774. BMO Nesbitt Burns, a long-time adviser to the company, led the share offering.

Fairfax last sold new shares a year ago, to help fund its $1.88-billion (U.S.) acquisition of Brit PLC. The financing included a combination of subordinate voting shares, preferred shares and debt – all of which had no trouble selling.

The holding company, run by Prem Watsa, got in a tussle with its investors last year when Mr. Watsa tried to amend the terms of his shares. The leader wanted a way to freeze his 41.8-per-cent voting control held through multiple-voting shares even when the company issues more equity over time. To secure it, he had to promise to never sell the shares, to stay on as CEO for a decade and to take an annual salary of $600,000 during that period.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 3:59pm EDT.

SymbolName% changeLast
ENB-N
Enbridge Inc
+0.53%36.18
ENB-T
Enbridge Inc
+0.29%48.95
FFH-T
Fairfax Financial Holdings Ltd
-0.54%1460.1
FNV-N
Franco Nev Corp
+1.59%119.16
FNV-T
Franco-Nevada Corp
+1.43%161.4
NB-T
Niocorp Developments Ltd
+0.82%3.68
THO-N
Thor Industries
+2.36%117.34
VALE-N
Vale S.A. ADR
+0.16%12.19

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