DBRS Morningstar Assigns BBB (low) Rating to Fairfax India Holdings Corporation, Stable Trend

DBRS Limited (DBRS Morningstar) assigned a BBB (low) Issuer Rating to Fairfax India Holdings Corporation (Fairfax India or the Company). Concurrently, DBRS Morningstar assigned an Unsecured Senior Notes rating of BBB (low) to the Company. All trends are Stable.

KEY RATING CONSIDERATIONS
The ratings assigned to Fairfax India are primarily driven by DBRS Morningstar’s expectation of support for the Company from its parent, Fairfax Financial Holdings Limited (Fairfax), and are notched down from DBRS Morningstar’s rating of the parent at BBB (high) with a Stable trend. Fairfax India is an investment holding company whose objective is to achieve long-term capital appreciation. The level of support reflects the extent of ownership and effective control by Fairfax; the Company’s name, which links it to Fairfax; the Company’s use of other Fairfax subsidiaries for investment management and other services; and Fairfax’s extensive international franchise in insurance and other activities. Together, these characteristics indicate the motivation for Fairfax to support the Company, if the need arose. The two notch differential between the ratings of Fairfax India and Fairfax considers that the Company is a non-insurance subsidiary based in Toronto whose underlying assets are predominantly located in India.

RATING DRIVERS
The rating of Fairfax India would be upgraded if there is an upgrade of the rating of Fairfax.

Conversely, the rating of Fairfax India would be downgraded, if there is (1) a downgrade of Fairfax, (2) a reduction in the perceived support from Fairfax, or (3) a downgrade of the sovereign rating of India to below investment grade.

RATING RATIONALE
Fairfax India is a publicly traded investment holding company focused on investing in diverse businesses, including public and private equity securities and debt instruments in India. Fairfax India's investments are made indirectly through its wholly owned subsidiaries based in Mauritius (FIH Mauritius Investments Ltd and FIH Private Investments Ltd). Its investments in publicly-listed and private companies include businesses with customers, suppliers, and business primarily conducted in or dependent on India. The Company seeks out organizations where the possibility of a long-term business partnership is feasible. The selection criteria are focused on businesses that are expected to benefit from the trends supporting India's economic growth that meet Fairfax India’s criteria for ethics, management continuity, valuation, financial track record, and cash flows.

The rating of Fairfax India reflects DBRS Morningstar's assessment of the potential support that would be expected from the Company's controlling shareholder, Fairfax. With total assets of $74 billion as at YE2020, Fairfax is a large global insurance group whose subsidiaries are active in the property and casualty insurance and reinsurance industry operating across various business lines. Subsidiary insurance operating companies are geographically diversified, with footprints in over 40 countries in North America, Europe, Latin America, Asia, and Africa, and managed through a decentralized multibrand strategy. Investment management for all subsidiaries is provided centrally by Hamblin Watsa Investment Counsel Ltd. (HWIC), a wholly owned subsidiary of Fairfax. In addition to Fairfax India, Fairfax holds a 49% interest in an insurance company as well as other investments in India.

Although there is no explicit support from the controlling shareholder, the assessment considers the position of Fairfax India within Fairfax’s overall group structure. Fairfax owns a 27.9% equity interest and a 93.3% voting interest, which gives it effective control of the Company. Fairfax India maintains an investment advisory agreement with Fairfax and HWIC. The agreement covers the provision of advice for all investment transactions and portfolio administration services. Fairbridge Capital, a wholly owned India-based investment advisor subsidiary of Fairfax, acts as subadvisor in the sourcing and assessment of investment opportunities.

Fairfax India has a diverse portfolio of investments in private and publicly traded companies. The Company has generated positive and consistent earnings over the past five years. However, earnings are volatile due to fluctuations in both realized and unrealized gains on the valuations of its investments. Fairfax India has significant exposure to market risk through the amount of equity investments on its balance sheet that are susceptible to equity market fluctuations.

The Company’s current sources of capital include interest income on holdings of Indian sovereign and corporate bonds, dividends from its Indian investments, sales of asset and the equity markets through share issuance. Fairfax India also has short-term debt in the form of a bank term loan. The leverage ratio was 18.3% as at YE2020, with a three-year weighted-average fixed-charge coverage ratio of 5.6 times.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (July 21, 2020: https://www.dbrsmorningstar.com/research/364260/global-methodology-for-rating-life-and-pc-insurance-companies-and-insurance-organizations). Other applicable methodologies include DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 03, 2021: https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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