Fair Oaks Income Share Discussion Threads

[atholl91] 16/3/2017 10:52

Cerrito,Have gone for 2017 as my contact has always believed that M Fuentenbro is one of the top CLO managers around. Cannot think he would want to leave and start again although always possible. He delivered excellent results when at CIFU.

[cerrito] 14/3/2017 12:55

Have you folks made a decision as to take the 2014 or the 2017 shares?

Having read the prospectus I am veering towards the 2014 ones.
Two reasons. I have no idea how this market will be in over the coming years and am reluctant to take such a long term view. I am sure that in the coming years there will be a market dislocation when I can buy in cheaper
The second is I saw the key man provisions and emphasized the point that while management may now-in the words of the Chairman-be nibble will Messrs Coyle and Fuentenebro(the two named key people) want to move on and do other things? and I have no idea of depth of management.
Be interested in the views of others.
Read with interest the risk section and was reminded that we bear the prepayment risk if underlying borrowers prepay given they can without penalty.

[cerrito] 14/2/2017 21:09

The 4.1% adjusted for dividend increase in January no surprise bearing in mind report posted by davebowler the other day on the VTA thread

[davebowler] 11/1/2017 16:17

Liberum;
CLOs

Fair Oaks Income Fund (Mkt Cap £250m)
26.4% NAV return in 2016

Event
Fair Oaks Investment Fund's (Fair Oaks) NAV per share was $1.005 as at 30 December 2016, a 3.8% monthly return including dividends. The company declared a dividend of 5.75 USD cents per share in December that brings the total dividend for the year at 13.45 USD cents per share.

The shares will go ex-dividend on 12 January 2017.

The JP Morgan CLOIE post-crisis B rated index was up 4.5% in December. Fair Oaks’ positive monthly performance was driven by both equity and mezzanine investments. Market default rates in the US decreased slightly to 2.06%.

Fair Oaks has confirmed its intention to proceed with the proposals under which Shareholders will be offered an option (but will not have an obligation) to extend the duration of their investment, and also with a further equity raise through a C share. The documentation in respect of the proposals is expected to be published in early March, with a deadline for elections under the proposals and applications under the fund raise in late March.

Fair Oaks believes that control positions in new CLOs have the potential to offer one of the most compelling investment opportunities in credit markets at this point in the cycle given supportive loan fundamentals and tight CLO liabilities.

Liberum view
Fair Oaks' 2016 NAV total return was 26.4% validating Fair Oaks' strategy and the significant investment opportunities CLOs present. We expect the positive NAV performance to continue based on the strong credit performance of the equity investments during the year and the opportunistic investment in mezzanine tranches. Fair Oaks currently trades on a 2.7% discount to its December NAV against the peer group average of 3.1%. The current yield is 13.8%.

[cerrito] 14/9/2016 14:21

I had been pondering your question digger61 and I have had no thought of buying more or selling. I do not see a great improvement in the US CLO market and while cable may fall to $1.28 and thus give us a small FX gain do not see it falling much lower.
Not surprising that the price fell today if they are returning capital-albeit a v small amount-at at a time when the share price is at a premium to the NAV.
PS Congrats to those who bought these in the dark days of Feb and thus enjoying an increase in both the share price and the currency.
Nothing earth shattering for me in today’s NAV figures-just steady progress

[digger61] 11/9/2016 16:22

Anybody buying these at the moment?

[cerrito] 29/8/2016 23:02

Been through FAIR’s interims.
Given the good monthly info, not all that much new but the following from the Manager’s Outlook Statement and is of interest
Quote
The commitment period of the Master Fund ended on the 12 June 2016 and the Company will soon commence making principal repayments to investors. Although the bulk of the principal distributions will be made from the second half of 2018 onwards when the Master Fund expects to call its CLO equity positions, it is expected that some principal distributions will be made from quarterly cash-flows received by the Company. For illustrative purposes only, a CLO equity investment which distributes c.20% cash-flow p.a. of which c.15% p.a. is income will generate c.5% p.a. of principal. Principal distributions may be accelerated if, for example, the Master Fund were to sell CLO mezzanine positions that have traded up significantly since their purchase.
Unquote
Noted in the Cash flow that distributions from the Master Fund in this H1 16 were $26m up from $6m the year before. Cash and Distribution Receivable were $13m at 30.6.16 compared to HI Dividends of $18m.
Too bad they did not follow CIFU’s example and tell us the sensitivity to interest rates

[cerrito] 11/8/2016 00:03

Thanks davebowler for sharing that Liberum update
Yieldsearch: Your understanding was the same as mine but if you read note 5 in the Annual Report which discusses interest rate risk which shows a falling Libor having a negative effect on P&L. Need to think more.
Also note that they say if interest rates fall 1% decline in NAV is $1.8m which needs to be seen in the context of financial assets of $275m.

[davebowler] 10/8/2016 11:02

Liberum;
Specialist Finance

Fair Oaks Income Fund
Stellar 13% NAV return in July

Event
Fair Oaks Income Fund has announced a stellar NAV uplift of 13.2% to $0.929 for the month of July. The NAV uplift was due to a combination of an improvement in pricing and strong cash flow receipts during the month.

The junior CLO markets had one of the strongest months on record with the JP Morgan CLO B-rated Index up 8.4%. The company's equity positions also repriced significantly and generated substantial cash distributions in the month. All CLO equity positions except one distributed cash-flows in July which were ahead of expectations ($18.1m actual vs. $17.0m expected).

[yieldsearch] 10/8/2016 01:42

FT article:

Rising benchmark raises borrowing costs for companies
Higher three-month dollar Libor also affects vast universe of collateralised loan obligations

Interesting article highlighting that CLO have benefited from libor floor on loans and with interest rate increase in the US, the benefit of this libor floor is reducing.
My understanding below, however may be completely wrong: CLO are libor based vehicle, asset (loans) are paying libor and a spread, and the clo notes are all libor based except the most junior piece, the equity, taking all excess cash
It seems that the loans have libor floor (at 1%), therefore when the libor rate were lower than 1pc, the assets were paying 1pc but the liabilities (clo notes) were using a lower libor, hence creating more excess cash for the most junior tranche, the equity. With the gearing in place, this may be material. With USD libor increasing it seems that this extra cash will potentially not available anymore.

Not sure what is/will be the impact on clo funds like Vta, Cifu, Fair, fair to say that it is most likely negative. Really based on their exposure to clo equity piece, and if this increasing interest rate environment was priced in the valuation of those assets.

[dentrias] 15/7/2016 08:33

The fund included comments re impact of Brexit in the June factsheet here: hxxp://www.fairoaksincomefund.com/reports/monthly-performance-updates/2016.aspx

[digger61] 07/7/2016 17:11

Anybody any thoughts on this fund after Brexit?

[cerrito] 13/6/2016 22:28

Have no idea webclick99 and no doubt the manager will tell you if you email them.
As I have mine in an ISA not bothered.

[webclick99] 13/6/2016 07:49

Reading the latest Fact sheet, the fund will receive a distribution in June and a substantial distribution in July. Investors can expect to begin receiving principal repayments later this year.

Does anyone know how this will work given its principal being returned? Will the share price reduce by the amount of the distribution or are these in effect a special dividend, so the share price not affected?

[cerrito] 15/4/2016 23:26

FAIR's March monthly report out; not much to report. As anticipated NAV was up for the month -by 6.05%; that lagged the JPMorgan CLO single B index which went up 13.39% in the month.

[cerrito] 10/4/2016 21:43

I did see Wirral's involvement and I guess it is through their pension fund though for me FAIR is not an obvious investment for a Local Authority pension fund given its long term outlook and FAIR's investment period is about to end.

With Fair out of the investment period the question is how long will it be in existence for and I cannot find any information on how many of the CLO's they have invested in are in run off, what is the average length of the loans they have invested in on a see through basis and what is the prepayment experience. Anyone have any ideas on this??

[danieldruff2] 09/4/2016 07:37

Anyone note from the report that Wirral Borough Council owns 5% of the stock!

[horndean eagle] 09/4/2016 04:47

Cash flows post June will rise markedly. Wouldn't be surprised with 15-20c per annum being returned. They had numerous equity positions which are due to make first distributions in June and September. Fair being in run off means you don't have to worry about discounts or premiums in the longer term. Cifu performance has been woeful over the last few years. Vta a safer bet.

[cerrito] 08/4/2016 21:39

I have had a run through of the annual report; the Investment Adviser’s section is well worth reading for a commentary on the CLO Market; also their policy of not investing in too many CLO’s as by having fewer they can have a Control Position and remain focused.
The Annual Report reminds us that the Investment period ends on June 12 after which all income/principal received by the Master Fund goes to FAIR(and I need to get to grips with the implications of this) and that they had their first default in Jan this year but at 0.03% was very well below the industry standards.
From what I had read in the past I did have a concern on the impact of interest rate changes but as at Dec 31 15 a 1% fall in interest rates would have a negative $1.8m and a 1% increase a positive $1.2m- ie given total assets are $284m not all that significant.
Going through the figures was and is a minefield; to me the amount of cash received by FAIR from the Master Fund is important and confusing that they give us two figures-In the reconciliation of financial assets in Note 7 they tell us it is $28m and the cash flow has $18m and I need to sort out.
I read the monthly summaries from Liberum kindly posted by Dave Bowler which suggest I am misguided to hold FAIR rather than CIFU/VTA as Fair trades at a premium; I went into FAIR partially as I was lazy as they took over the CLO’s of GLIF and also was impressed by their investment policy. For me the wide bid/off spreads have held me back from a switch from FAIR to CIFU. That said I am in a more positive frame of mind having read Dave Bowler’s posting of Liberum’s reading of the annual report earlier today.
I would be interested in the comments of others.

[davebowler] 08/4/2016 10:12

Despite FAIR being at a premium to NAV Liberum are positive.VTA is on a big discount to NAV so seems much cheaper.

Liberum view;
Fair Oaks Income Fund
Strong portfolio fundamentals

Event
Fair Oaks's NAV total return in 2015 was -1.2% mainly due to mark-to-market weakness in the second half of the year which offset portfolio income. The market volatility has continued post year-end with a NAV decline of -9.7% in the two months to February 2016.

Despite the weakness in the loan market and the subsequent mark-to-market difficulties in the CLO market, Fair Oaks remains on track to achieve the targeted 12-14% p.a.total return for the fund. The portfolio default rate remains extremely low at 0.03% which is due to one default (out of a total of 976 issuers in the portfolio). Oil and gas exposure remains low at 1.9% compared to an average of 3.4% for post-crisis CLOs. The average bid price for loans in the portfolio was 95.33 which is well above the 91.43 average for the Credit Suisse Leveraged Loan Index at the end of December.

Fair Oaks invested $206m in 18 new investments in the year. This included the addition of mezzanine positions following the recent market correction. The average expected gross return for 2015 investments is 14.2-16.0%.

The Master Fund's investment period is due to end shortly (June 2016) and the fund will begin returning capital after that point.

Liberum view
The markdown in CLO positions and consequent NAV decline undoubtedly creates short-term issues for investors but this also represents an opportunity as CLO equity generally outperforms when the loan market sells off as managers are able to purchase loans at a discount to par and help build the NAV (of the CLO). To a certain extent, focusing on the CLO equity NAV movement which is impacted by falling loan prices on a levered basis overlooks the benefits of the CLO's term leverage structure. Assuming CLO investments are held to maturity (and they generally are in a permanent capital structure), the ultimate returns will be determined mainly by the credit performance of the portfolio and Fair Oaks is performing ahead of expectations in this regard.

We believe the fund's structure with the prospect of near-term capital returns is acting as a natural discount control and is one of the main reasons for the fund's premium rating relative to the sector (7% premium to NAV vs. average 9% discount for peers). Furthermore, Fair Oaks' performance fee structure ensures alignment of interests as shareholders must receive their initial investment back plus a preferred return (7% IRR) before any performance fee is paid.

[cerrito] 30/3/2016 21:18

Just caught up with the February figures and they were a shocker- NAV down 6.64% although they did say that was better than the JP Morgan single B CLO Index which was down 10.2% in the month.
No reason given for this performance though it did mean that we had extra information this month . Too bad we do not get/I cannot find figures of quarterly cash distributions as I was keen to see if they got in the $14.7m they said in December they would get in January.
Incidentally I note that as at end Feb their largest exposure was to First Data-1% -which was the largest exposure for VTA at their last Annual report date and Valeant was the 4th largest. They give us figures for O&G exposure-great but would be good to have it for O & G suppliers as well. Default rate continues at 0.03%.
Note today’s mid price share price was 83c compared to Feb 29 of 78.4c and let’s hope the market’s optimism is justified.

[cerrito] 22/2/2016 20:38

Just caught up with January figures; I see that NAV including dividends paid was down 3.4% in Jan but as they paid a 2.2c dividend a creditable performance taking everything into account.
Sad they have had their first default –total exposure was $1.9m(nominal??market??) out of a portfolio which has a marcap of $267m.
Energy Exposure was 1.9% but no mention of exposure to Energy suppliers-at least none in the top 10 exposures.

[yieldsearch] 19/1/2016 12:18

Copied from VTA, was posted by Davebowler

Liberum on FAIR;
Event
FAIR's NAV fell by 3.3% in December 2015 to $0.866 as the company's CLO equity positions were marked down in the month because of lower loan prices within their portfolios.

The Master Fund may benefit from the loan price volatility over time as loan prepayments can be recycled into new opportunities at discounted levels (average price of S&P Leveraged Loan Index is 90.5).

The underlying portfolio continues to perform well with zero loan defaults to date and the company's CLO equity positions are expected to make quarterly cash distributions of $14.7m in January 2016 (compared to a projection of $11.3m at the time of investment). Dividends for 2015 were equivalent to 11.5% of the December NAV.

Liberum view
Of the listed CLO fund peer group, Carador and FAIR are likely to have been most affected by recent mark-to-market movements given their high weightings to USD CLO 2.0 equity tranches. The key risks to the realised return of equity tranche investors are loan defaults, Libor rate increases (removing the benefit of the Libor floor) and a decrease in the spread on the loan portfolio. Loan defaults in the market have risen slightly but are still well below historical averages and the 3 month US Libor rate has moved up to c.60bps following the Fed rate rise. The impact of these will be partially offset by the rise in loan spreads which will present opportunities for CLOs that are still in their reinvestment period. FAIR is currently trading on a 7.4% premium to NAV compared to a 10% average discount for the peer group (assuming an average 2% NAV drop in December for peers).

[cerrito] 18/1/2016 11:58

Mr Market clearly does not like today's announcement and is perhaps spooked that the Dec 31 share price was at an almost 10% premium to the Dec 31 NAV.
Certainly the market commentary is very bullish and makes the point that the default experience of the fund is key.
I will not be buying more as I cannot see the $ strengthening all that much more against the £(I appreciate I have been wrong in this as thought 1.51 would be the bottom ) but for US$ based investors this seems well worth a look.

[cerrito] 20/12/2015 13:42

I see that over the three months to Nov 30 15, the CS Leveraged loan index was down 1.68% and for the year 0.54% while the CS High Yield index was down 2.13% for 3 months and 3.72% for the year. As stated the high yield index has performed worse as it has more O & G exposure.
Let's hope the £ continues weak till the FX rate for the next dividend is set