DBRS Places Cunningham Lindsey’s Senior Debt Under Review - Positive

DBRS has today placed the CCC-rated Senior Unsecured Long-Term Debt of Cunningham Lindsey Group Inc. (Cunningham or the Company) Under Review with Positive Implications following the announcement that a private equity fund, Trident IV L.P., managed by Stone Point Capital LLC (Stone Point) is to invest approximately $80 million in a new holding company (Newco) that will assume ownership of the operating subsidiaries of Cunningham. This investment translates into a 51% interest in these operations. Fairfax Financial Holdings Limited (Fairfax), which currently owns all of the multiple voting shares and 84.1% of the subordinated voting shares of Cunningham, will purchase, for approximately $10 million, the outstanding subordinated shares of Cunningham which it currently does not own and will invest an additional $20 million directly in Newco to take a 45% stake, while management of Cunningham and its subsidiaries will acquire the remaining 4% equity interest.

Of the $100 million of new money being invested in the operating subsidiaries, $72.8 million will be used to repay an unsecured non-revolving term facility due to Brookfield Asset Management (bearing a coupon of prime plus 3.5%), approximately $10 million will repay loans advanced from Fairfax (7% interest rate), with the remaining $17 million to provide working capital, to pay down other liabilities, and to cover transaction costs.

As a result of this transaction, Trident IV and Fairfax will share ownership of the Cunningham operations. The overall interest burden of the Company will be substantially reduced following the retirement of the Brookfield credit facility, which benefited from both a Support Agreement from Fairfax and an upstream guarantee from the operating subsidiaries. The senior unsecured debt that matures on June 18, 2008, will now therefore be the highest ranking debt in the organization aside from bank lines at certain operating subsidiaries. Moreover, DBRS expects that Fairfax and Trident IV will indirectly refinance the $125 million of maturing senior debt in the private debt market, replacing it with their own resources, if necessary. The current DBRS rating on the senior debt of Fairfax is BB (high) with a Positive trend. The Trident IV private equity fund was closed on September 13, 2007, with USD2.25 billion in capital. Since 1985, Stone Point has raised more than $10 billion for investments in the insurance and financial services industries.

By reducing its interest burden, the Company is more likely to start to report positive operating cash flow, which will allow it to either build its business or retire additional debt. In either event, debt service coverage ratios are expected to improve following the transaction.

The final rating action will be taken following the closing of the transaction, which is expected in December 2007.

Note:
All figures are in Canadian dollars unless otherwise noted.