Fair Oaks Income Share Discussion Threads

[cerrito] 02/7/2020 10:19

FAIR has a pretty stable shareholding structure. I know we have had 2 change of Holdings RNS in the last 3 weeks, but over the last year there have only been 6 and three of these refer to the exit of Standard Aberdeen.

[yieldsearch] 01/7/2020 13:40

sure np. You may want to look at Volta finance, similar investment but seems to be better asset allocation/better asset manager. The reporting on volta is explaining the CLO structure and the income diversion.

Also if you look also at the historical price on volta (ie more than 10 years, look at what happpened in the last crisis), you will see that those vehicle are extremely volatile. there is a reason for high dividend..

re fair (and other clo vehicle): as long as the default of assets held by clos are not crystallising losses (that is the big IF), eventually the NAV will go back up and clo coupon will be paid and fair dvd paid. timing uncertain though and big IF!!

[caternia] 01/7/2020 13:18

Thanks Yieldsearch. I now have a better understanding. Will leave for a while before deciding if I should get out as recently there has been an uplift in the share price. Made a cardinal mistake in buying a share without fully understanding their business. I remember money observer once gave them an award for their performance, that seems a long time ago!

[yieldsearch] 01/7/2020 12:55

Caternia: completely different type of assets:

IPE and SMIF are holding corporate debts (bank AT1 etc). Coupons on the corp debt is paid as dvd.

Fair is investing in CLO junior bonds and equity. one feature of clos is that it can switch off payment to junior bonds and equity if there are specific breach of credit tests (weighted ratings, overcollateralisation test, etc). A number of those are breached.

[caternia] 01/7/2020 11:14

I find this strange that a monthly income investment trust is still suspending a monthly payment. We have lost out on April, May and June and it looks like there it is not going to be a monthly payment soon. Markets have recovered. I hold IPE and SMiF and they continue to make payments.

[spectoacc] 16/6/2020 07:21

Inc 10% in a month, and that was as of 2 weeks ago.

Mind you - still a way to go.

[grahamg8] 16/6/2020 07:18

Cerrito follow the story
20/3 NAV 74.33
15/4 NAV 36.43 price trashed on Covid fears
24/4 Market opportunities identified
27/4 New shares issued at 37.2
19/5 NAV 41.18
16/6 NAV 45.31
New shareholders have made 21.8% in 50 days. I rest my case.

[caternia] 28/5/2020 21:48

When will I get a monthly dividend?

[spectoacc] 20/5/2020 07:02

Ta. Not as low as last time, won't bounce as high, but the recently-raised cash should give us another good gain next month too I reckon.

[rambutan2] 19/5/2020 20:50

As expected, nav up in April for what it's worth. More interesting perhaps is that the manager is busy...

[cerrito] 24/4/2020 08:11

grahamg8
Call me naive, but I think you are being a bit cynical although it is an occupational hazard as a private shareholder in a company like this.
My view is that given the state of the market at the end of March and in all likliehood at the end of April the NAV is more art than science.
I agree that good that they have more fire power.

[spectoacc] 24/4/2020 07:30

Hmm can't disagree - tho am glad there's new money coming in, which they can put to work at much better prices.

[grahamg8] 24/4/2020 07:27

Issuing new shares to satisfy demand sounds great. But the management of this company is pretty dodgy to say the least.

Try this for size. Publish dire warning about asset erosion due to expected defaults. Update the NAV at massive loss. Issue new shares to yourselves and buddies at the now much reduced price. 'Discover' that things aren't quite as bad as previously indicated. Revise NAV upwards, private shareholders are grateful for the sterling job done by managers who walk away with a massive profit as the shares revert back to near their original price.

If you think this sounds far fetched just look back at some of the more than murky activity that has been taken place in the past.

[rambutan2] 17/4/2020 21:39

This from SMIF's march commentary:

Portfolio Commentary
The portfolio looks to take advantage of liquidity premium in credit markets. The managers were not expecting a viral pandemic that would result in the complete evaporation of liquidity across all fixed income sectors. In addition, the gap lower across all bond sectors, in an indiscriminate fashion, had a material effect on the underlying NAV. The forced selling from ETF accounts and margin calls being breached from levered accounts created an unprecedented period as the ‘dash for cash’ left quality assets at depressed valuations.

The managers did not capitulate but saw pockets of the market as being oversold, despite appreciating the high level of uncertainty that the pandemic had created. The managers presumed that the velocity and ferocity of the market decline could not continue for too long, and that it created a medium to long term opportunity to replenish the Fund. This was in complete contrast to earlier in the year when the managers were growing concerned about re- investment risk. As a result of this opportunity, and to satisfy investor demand, the Fund issued just over 20m new shares.
Market sentiment gradually improved toward the end of the month as medium term buyers emerged to add credit at new enhanced values, although liquidity remains low as many market participants work from home. The managers very selectively added risk, though offers at the quoted levels were difficult to source, indicating an underlying supportive technical backdrop, despite the ongoing uncertainty.

As would be expected credit indices posted negative returns across the board in March with the Coco index at -15.13%, Euro HY -13.21%, STG HY -13.19% and US HY -11.76%; CLO markets declines surpassed the vanilla markets as liquidity disappeared.
The Fund returned -20.93% during the month. CLO was the biggest detractor from performance contributing -11.05%.

Market Outlook and Strategy
The managers continue to add selective credit at credit spread levels that could represent the best entry point in years, thereby adding quality yield that will benefit the Fund over the medium to longer term. The managers recognize the global economy is very much in the very early stages of recession, hence the focus will be on high quality credit from the most robust sectors. Default rates are likely to spike and downgrades will be frequent, so the more speculative end of the credit spectrum is likely to perform poorly and will be avoided, despite the high yields on offer.

[rambutan2] 17/4/2020 21:37

I read through the AR, but as acknowledged, it's all of little consequence now we're in Coronaworld. That said, they didn't have a great year and there's little explanation/commentary as to why. Still, the manager did very well coming out of the 08/09 collapse and the placing yesterday shows that some have confidence in him doing the same again. I did buy a small position at the recent lows, so now have some skin in the game here.

[spectoacc] 17/4/2020 21:10

Foxtons the one that got me - raised at a premium! Who, in their right mind, would be giving money to Foxtons..

(Thanks re quote above - so significantly more conservative but still lost 50% of value in a few short weeks).

[cerrito] 17/4/2020 16:57

Just to show how active the placing market is, this morning two of my holdings who cannot be more different-ECSC and FAIR- announced placings.

[cerrito] 17/4/2020 16:54

Yes agree this placing is OK.I can understand that there is US$3m of capital wanting to get in.
My takeaway, which may be completely wrong, is that there was no big holder wanting to exit at any cost. This prompted me to remind myself of the shareholder structure. There are 5 holders who have between them about 45pc of the shares as at March 19 2020.Over the last year the 5th largest Smith and Williamson seem to have exited to be replaced by Seneca at 5pc odd- never heard of them=they are a Liverpool based fund manager. Also the largest holder Quilter have gone down from 15.64pc to 12.75 but cannot find a RNS for this.
Hopefully I am right in my reading as this share has enough headwinds without largish holders wanting to exit.
You will have seen the December annual report was published today. I have yet to read it in depth but here is the outlook statement of the IM.
quote


The outlook for financial markets, and the Master Funds,
has changed significantly in the first quarter of 2020 due to
the spread of COVID-19 and the impact of the associated
mitigation and suppression actions by governments around
the world. At the time of writing, it is too early to predict the
severity or duration of the economic impact of COVID-19
or how a now likely increase in corporate defaults may be
mitigated by government support.
The Master Funds de-risked significantly ahead of the spread
of COVID-19, exiting five majority equity positions in 2019 and
a further three majority equity positions and a minority equity
position in January and early February 2020. Reinvestments
were in rated CLO debt and in a European CLO and CLO warehouse which both have portfolios significantly more
conservative than the market average.We will continue to work to manage the risk in the portfolio,
through disposals and opportunistic reinvestment and by
working with the managers of CLOs in which the Master
Funds hold equity positions, aiming to minimise credit losses
in the loan portfolios and take advantage of opportunities
appropriately.
unquote

[spectoacc] 17/4/2020 07:38

For once - quite happy with a placing:

"The Board is pleased to announce an issue to satisfy market demand of 7,194,623 new 2017 Shares (the "New Shares") at an issue price of US$0.372 per New Share, representing a premium of approximately 2% to the latest published NAV.

The net proceeds of the issue will be invested in accordance with the Company's investment policy, with FOMC II (the "Master Fund") expected to invest in CLO debt securities in the secondary market, which the Investment Adviser believes offer attractive risk-adjusted returns over the medium term."


Cash for taking advantage of opportunities exactly what's needed IMO.

[cerrito] 16/4/2020 17:33

Just had a look at the end of March.
First confession time, I had not come across the term BWIC before and went to hxxps://www.investopedia.com/terms/b/bwic.asp
to see what it was all about.
No surprise that these increased in March.
As I commented re VTA difficult to know how much credence to place in these figures.
Good that they gave us extra info.
Note portfolio composition per ratings identical end of March as at end of Feb..no surprise and will be interesting to see how this evolves.
My current thinking is to stay with what I have got although I need to work out if this is consistent with their base case assumption that bank loan defaults will peak at 8.25% strikes me as optimistic...but then is this payment default or covenant default?

[cerrito] 16/4/2020 17:08

I see US2.5m worth of off book trades at 37 today.

[yieldsearch] 15/4/2020 09:34

Davebowler post in the VTA board, copied below:


Liberum;
Large mark-to-market NAV impact in March

VTA: Mkt Cap £123m | Prem/(disc) -23.4% | Div yield n/a - Suspended

FAIR: Mkt Cap £144m | Prem/(disc) 9.8% | Div yield n/a - Suspended

Event

Volta Finance and Fair Oaks Income Fund have both reported large NAV writedowns for the month of March:

Volta Finance's NAV per share fell by 32.4% in March to €5.06. Mark-to-market performance across the company's asset classes was -36.9% for CLO equity, -41.3% for CLO debt, +0.1% for cash corporate credit and -4.5% for bank balance sheet transactions. Average prices for CLO equity tranches were 43.6c and 28.9c respectively for USD and Euro positions. USD CLO debt tranches were priced at 54.3c.

Fair Oaks Income Fund's NAV total return in the month was -50.5%. The average valuation for BB and B rated CLO tranches in the portfolio was 54c and 45c respectively. All of the investments are in full compliance with their overcollateralisation tests.

Both managers expect to see a rise in loan downgrades to CCC, followed by an increase in loan defaults. Volta expects to see partial diversion of CLO equity cash flows from July due to an increase in CCC-rated loans in CLO portfolios. Over the longer term, the manager expects a downgrade in underlying loans to the point where CCC-rated loans reach c.15% on average of CLO portfolios. This could trigger a diversion of payments away from CLO equity tranches.

Market expectations are for an increase in loan defaults to c.10%, in line with the global financial crisis. The spike in defaults in 2009 was relatively short-lived, with a significant reduction in 2010. Due to the increased prevalence of covenant-lite loans, Volta believes default rates may be above average for a number of years, but there is unlikely to be an increase as sharp as occurred in 2009. This would be beneficial for CLO equity positions as it would allow more time for reinvestment of capital into loans at a discount.


Volta has sought to maximise balance sheet liquidity. Four positions have been sold for a total of €9.7m to fund margin calls on FX hedges and drawdowns. These disposals resulted in a loss of €0.13 per share in the month. The amount of currency hedging has been reduced to minimise margin calls and Volta previously announced the cancellation of the April dividend. Cash on the balance sheet at the month-end was almost enough to close the repurchase agreement. April is typically a month of relatively high cash flows due to quarterly payments from the CLOs.

Liberum view

CLO structures include a number of protections that are designed to protect senior noteholders from losses including overcollateralisation tests, interest coverage tests and limits on CCC-rated loans. The typical limit on CCC-rated loans within portfolios is 7.5%. A breach of this limit could leads to payments being diverted to repay the senior debt tranches of the CLO. The repayment of the senior debt would increase the average cost of financing within the structure and reduce the excess spread for CLO equity tranches.

S&P Global estimated that 19% of US broadly syndicated CLO loan pools comprised B- loans at the end of 2019. Rating agencies were criticised for acting too slowly in the 2008-09 financial crisis and are likely to be much quicker in responding with downgrades this time around. These weaker credits lack flexibility to withstand the impact on revenues during a global recession

Both managers have outlined that the depressed valuations offer potential for high returns, as in 2009. Based on the current valuations, Fair Oaks models a 21.2% gross IRR for the portfolio after stressing the loan-level assumptions (9% default rate in year 1, 3.5% thereafter with 60% recovery rate). The principals of the manager intend to personally invest $0.65m in Master Fund II alongside a new commitment in the fund. We also note the c.4% increase in US and European loan indices to date in April, offering the potential for a partial NAV recovery this month

[spectoacc] 15/4/2020 09:23

Thanks @Yieldsearch. Was just surprised it halved in what, about a week at the end of the qtr. Without the Fed having our back, could have halved and halved again by 15th April. Is the sheer rapidity of it I find terrifying, 2008 was really 2007/2008, months if not a year.

[yieldsearch] 15/4/2020 09:17

SpectoAcc: Yes it can be surprising but really due to the nature of a clo. It is a highly leveraged vehicle,slicing the income received to pay each level of debt issued, with the equity tranche (ie Fair) being the most junior and receiving the highest return.
Cash can be diverted away from the equity tranche based on a large number of test: rating, over collateralisation, market value etc etc.
Here Fair decided to stop dvd, i guess driven by the nature of the clo, the income for the equity piece is subject to the satisfaction of numerous test ( most likely average rating is one of them).

All in all, the equity piece of a clo can suddenly receive no interest and potentially face write down (some loans may default, losses etc). a decline in value of 50% is realistic and really could be more (think of it as a bond that was receiving coupon, not anymore, with principal to be received on time, not anymore with potentially some writedown). If you look at the 15 year price chart of volta finance, you will see how volatile it is.

So while the Fed is basically a buyer of last resort in high yield bond (yehhaahhhh!!!), I am not sure the effect of this support on downgrade (and subsequent effect of downgrade on clo test/payment of dvd). So dvd may not be reinstated quickly. the only benefit of fair is the receipt of dvd, we could end up with a high price (fed propping up) and no dvd (rating downgrade action)

Clearly this will reach a bottom eventually ( i guess 2-4months) and may be a very good recovery play, but it seems too early

[spectoacc] 15/4/2020 07:42

Before the taxpayer bailout! Strewth. And that's only to 31st March, ie without US taxpayer, how much worse was it getting in April?


"As at the close of business on 31 March 2020 the estimated unaudited Net Asset Value of the Company's Shares was as follows:


Fair Oaks Income Limited 2017 Shares

USD 0.3643

Monthly performance -50.52%