Fair Oaks Income Share Discussion Threads

[cerrito] 16/4/2020 16:08

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

[yieldsearch] 15/4/2020 08:34

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 08:23

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 08:17

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 06:42

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%

[spectoacc] 13/4/2020 13:56

@Yieldsearch - preposterous isn't it. We went through the looking-glass in 2008, now we seem to be at the Mad Hatter's Tea Party (no relation to the US Tea Party). @Cerrito - my hope is FAIR will "play" it well - ie sell some otherwise-bust high yield, covenant lite to the US govnt buyer. Then perhaps return the cash. Stuck in some consumer loan rubbish but all the corporate, CLO etc getting nicely but farcically supported.

[yieldsearch] 13/4/2020 12:04

SpectoAcc /Cerrito: the US tax payer has really bailed out the private equity sector, and indirectly propped up the market price of leverage vehicle such as fair, volta etc. Prior to covid, we had a market of covenant lite debt structures, zombie corporate that would normally go bust save for the cheap funding. Now, it sounds like the measures taken by the central banks are really nationalising the private debt sector (well the high yield.high risk sector so far). Zombie corporate are the norm now

[cerrito] 13/4/2020 10:36

SpectoAcc That is the way I see it as well. My current feeling is to stay with what I have especially as there are so many other situations to look at. There is a good case to take advantage of this Fed inspired rally to sell and a good case to buy more. Given the current illiquidity in the shares, a bit theoretic.

[spectoacc] 13/4/2020 07:21

The more I read, the more I think the US taxpayer has bailed out my small shareholding in FAIR.

[spectoacc] 09/4/2020 15:50

The Fed has got our back. Not sure how I feel about that but.......

[yieldsearch] 09/4/2020 15:34

Jay Powell said the Federal Reserve would use its powers “forcefully, proactively and aggressively” until the economy recovers from the coronavirus shock, as the US central bank moved to offer an extra $2.3tn in credit and support the market for high-yield corporate debt. High yield corporate market supported by the Fed. i guess explain the rally today..

[spectoacc] 09/4/2020 10:26

Perkier, & someone just paid full ask for 80k. Edit - and now a 10 cent, 25% spread.

[cerrito] 08/4/2020 12:31

Thanks rambutan2 for your detective work here. I have just caught up with the Dryden webinar which I thought was very good and reccomend people listen to it. Interested in the comment that until last Friday at least there had been no forced sellers; not surprised that they commented more than once that the market had bifurcated between high and low grade;were bracing themselves for an increase in their CCC exposure due to downgrades. The way I heard it was that they went into this with 15%CCC and reckon this will peak at 25/37%; also increase in defaults which for the European book started out at zero and will peak they estimate at 6/7%...although not clear if this was a payment default or a technical one; bid/offer trading spreads on high quality was between 2 to 3 and low quality between 5 and 10-no surprise for me there. There will be a time to get back into FAIR-though as a sterling investor I need to be aware of cable. I think it will fall further,

[rambutan2] 02/4/2020 21:30

MGCI comment: hTtps://docs.mandg.com/docs/ciit/Covid-19-Update.pdf

[rambutan2] 02/4/2020 20:06

Hunting for any info/insights, so signed up for this with no hassle: FAO all European Dryden CLO investors: PGIM will be recording and uploading a market update that all current Dryden CLO investors are invited to download and listen too. The webinar will be available Friday 3rd April at 10am. Please find attached the webinar registration link below. https://investegate.co.uk/dryden-48-euro-clo--irsh-/rns/european-dryden-clos---investor-update/202004011635424752I/

[spectoacc] 02/4/2020 13:24

Seemingly destined to tank on massive spread. Going to be a while before FAIR shakes out.

[cerrito] 31/3/2020 23:02

Thanks again Rambutan for that. I note his comment that at the moment no liquidity for equity tranches and little for B which will make valuation interesting. Interesting the comment in the Oak tree discussion that so far they have seen little forced selling which is my reading and the good security cover the BB tranches have in a CLO.

[rambutan2] 31/3/2020 20:03

CLO commentary: hTtps://twentyfouram.com/tag/clo/

[spectoacc] 31/3/2020 12:58

Comedy spread on FAIR now.

[cerrito] 31/3/2020 12:49

I can understand what SMIF are doing but I wo set how you measure NAV in these markets. rambutan 2 Thanks for the Oak tree link.

[rambutan2] 30/3/2020 19:29

Fairly recent from Oaktree: htTps://www.youtube.com/watch?v=kl6wE_kEr4M

[rambutan2] 30/3/2020 19:22

SMIF today: Company Update The credit market has endured significant volatility over the past month as market participants have reacted to the economic uncertainty brought about by the effects of the Covid-19 pandemic. Forced and indiscriminate selling has resulted in unprecedented volatility that in turn has created the opportunity to source assets that have been otherwise unavailable to investors for almost a decade. The higher yields available for selective credits in the current market have enabled the Board of Directors of the TwentyFour Select Monthly Income Fund to approve the issue of 20.9m new shares to meet specific investor demand. The estimated mark-to-market yield of the portfolio as at Close of Business 25th March 2020 is 13.01% based on NAV (gross, GBP hedged, current yield-to-worst). https://investegate.co.uk/twtyfr-selmth-inc-fd--smif-/prn/company-update/20200330155554PCB4D/

[spectoacc] 30/3/2020 14:36

They're only a small position for me (smaller now!) but the "long term" comment at the end seems a bit ominous - not going to be any swift return to normality: "It is premature to seek to quantify the fundamental impact of the pandemic, which will depend on an array of factors including the effectiveness of recently announced government intervention, but over time there is risk of underlying CLO managers being required to divert cash flows from CLO subordinated notes to purchase additional loan collateral in response to increased credit downgrades and defaults. At the portfolio level the Investment Adviser has also taken steps to minimise mark-to-market risk, retaining a prudent reserve of cash to cover any fx hedge and warehouse financing needs. The dislocation in the credit markets will create investment opportunities, which is expected to be a factor in the allocation of future cash flows as the Company continues to seek to maximise shareholders' total return over the long term."

[danieldruff2] 30/3/2020 11:14

My memory was that GLIF and CIFU suspended dividends for a couple of years, but it all bounced back to where it was. What a disaster GLIF turned out to be after it sold its portfolio on to FAIR

[cerrito] 30/3/2020 11:12

danieldruff230 Yes on my things to do list, although quite low down, is to remind myself of the GLIF days and if they suspended dividends.