BlackBerry Ltd.'s sunnier financial prospects – at least for the time being – may have won favour with investors, but credit ratings agency Moody's Investors Service is tut-tutting the company's biggest shareholder for its part in the smartphone maker's improved situation.
Last week, Fairfax Financial Holdings Ltd said it would buy an extra $250 million (U.S.) worth of BlackBerry convertible debentures, exercising an option on the refinancing from two months ago. The additional proceeds will double its original investment and increase BlackBerry's gross proceeds from the financing to $1.25-billion. The refinancing was announced as Fairfax pulled its bid to take over the company last November.
While the market has responded positively to several moves under new CEO John Chen, Moody's sees a different picture when it comes to Fairfax. This week, the credit rating agency called Fairfax's decision to upsize its bite of the debenture offering "credit negative" for Fairfax, as it will increase Fairfax's total investment in BlackBerry to $900-million, representing 11 per cent of Fairfax shareholder equity as of last September, up from 7.5 per cent. That "is aggressive given the large concentration in a single investment," Moody's said of the insurance and investment holding company.
Moody's does like the fact that Fairfax gets "structural protection" as its investment "ranks ahead of BlackBerry's equity holders. As subordinated debt, Fairfax's investment will be repaid before equity if BlackBerry's restructuring fails and a breakup of the company realizes lower proceeds than the firm's current enterprise value." Of course, Fairfax could also convert its debentures into stock, which would increase its interest in BlackBerry to 15.6 per cent on a fully diluted basis, up from 9.9 per cent.
The agency also notes the risks are offset by Fairfax's "high level of cash and short-term investments" which accounted for more than one-quarter of its portfolio investments as of the end of September.