Fair Oaks Income Share Discussion Threads

[bluemango] 09/11/2023 11:23

There's the Q3 dividend declared, 2c again, payment 15th December.

Yield is just under 15%.

[davebowler] 28/9/2023 08:56

Liberum-
Half-year report confirms quality of investment portfolio
Analyst: Joachim Klement

Mkt Cap £176m | Share price $0.53 | Prem/(disc) -9.2% | Div yield 15.2%

Event

Fair Oaks Income released its interim report for the six months ended 30 June 2023. For the reporting period, the NAV total return was 9.0% compared to -5.3% in the same period 2022. The NAV total return for the realisation shares was 9.7% (vs. -5.0% in the same period 2022). The increase in Nav has continued in the months since June. The August NAV was $0.581 for the 2021 shares for an additional 3% appreciation in NAV in the last two months.

Over the period, the Master Fund received total distributions of $33.2m (H1 22: $45.0m). Distributions in January were negatively impacted by large movements in Libor and Euribor which affected the CLO assets and liabilities differently due to timing issues. Distributions recovered in April. The focus on originating and controlling CLO subordinated notes has resulted in fundamental performance above the market average. Origination and control allowed the Master Funds to veto specific loans when the transactions were launched and to monitor and influence the CLOs over time. Lower fees in primary investments also allowed CLO managers to construct more conservative portfolios with no need to reach for yield. As a result, the Master Funds have benefitted from underexposure to sectors such as retail or energy.



Liberum view

In our in-depth note in August (Fair Oaks Income (BUY, TP $0.7) - Attractive CLO equity return outlook (43 pgs)) we emphasised the opportunity in CLO markets at the moment. As FAIR is marking its CLOs to market rather than mark-to-model, the downside is already reflected in the price and the ongoing recovery in loan markets leads to a significant pull on NAV higher. Add tot hat the sector-leading dividend yield of 15.4% and we recommend BUYing the fund with a TP of $0.66.

[bluemango] 21/9/2023 21:26

Yield is generous at current level (15%) and in current climate it's good to have a reliable, consistently high income flow from this. Would be quite content if it stayed at 8c pa for years to come.

[caternia] 21/9/2023 17:02

Thanks for that. Would rather the increased dividends than buy backs.

[scrwal] 21/9/2023 16:13

The distribution policy was changed in September 2022 - an RNS was issued on the 20th.
The new dividend paid was 2c as this was healthily covered going forward. Any excess cash would be used for buybacks because of the discount to nav.

[caternia] 21/9/2023 13:31

Disappointed that with interest rates gone up, we have received lower dividend amounts than 2022. Why is that?

[grahamg8] 24/8/2023 16:02

Yes, TFIF looks overpriced in comparison. VTA would diversify into Europe but I have always marginally preferred FAIR. MPLS is interesting. It is a mini FAIR but suffers from an even less liquid market, and high bid/offer spread. Could FAIR snap them up? Perhaps, above my pay grade.

[euameus] 23/8/2023 10:17

Stifel comment below. Interesting given recent price action.

Fair Oaks income - Is it really that different to TwentyFour Income?

One of the vagaries of investment trusts are that some trade close to NAV largely based on historical reasons while others seem to be overly punished. TwentyFour Income is a well managed fund and while fundamentally the securities it invests in (UK residential mortgages and CLO debt) may be secure, there is clearly headline and pricing risk in residential mortgages - especially the residential equity book (c.17% of NAV). The share price is currently trading in line with the NAV with a dividend yield of 8%. Fair Oaks Income which invests in CLO equity and debt trades at a 12% discount to NAV with a 15% dividend yield. Both are well managed vehicles, but we would be far more comfortable investing in CLO equity with its diversified pool of leveraged loans that can be actively traded versus a UK residential portfolio that has a static pool. In addition, Fair Oaks Income has a limited life structure, which means (assuming a 1-year extension) that the fund enters run off in 2024/5 unless investors opt for a roll over.

The question we are pondering is one of valuations. On a relative basis Fair Oaks Income appears cheap and likely better insulated from further macro pressure (on a NAV basis). There is also likely more potential for consolidation in the CLO sector with either of its peers (Volta Finance or Marble Point).

[cwa1] 16/8/2023 09:11

davebowler16 Aug '23 - 09:57 - 647 of 647
0 1 0
Liberum commentary on FAIR -
Strong distribution momentum from second highest yielding AIC fund at NAV
Analyst: Shonil Chande

Mkt Cap £170m | Share price $0.53 | Prem/(disc) -11.4% | Div yield 15.0%

Event

Fair Oaks Income’s NAV per share increased by 2.5%, to $0.598, in July 2023. This represented a 2.5% increase in the month (+11.8% YTD). Quarterly distributions received by the Master Fund in July totalled $21.1m, reflecting a 21.6% annualised yield on NAV and a 24.4% yield on yesterday’s closing price. Distributions have been increasing over recent months, with the portfolio benefitting from an increasing arbitrage spread of the underlying loan pool over the cost of CLO financing.

Based on July 2023 distributions, we calculate that the CLO equity portfolio was valued at a 4.0x multiple to cash flows, with the USD CLO equity portfolio valued at 2.9x and the EUR CLO equity valued at 4.9x.


Default rates in the US increased by 0.4ppts to 1.75% and by 0.53ppts to 1.51% in Europe. The European increase was due to Casino defaulting on a €1.4bn of senior debt.

The forward-looking distressed rate declined from 8.47% to 7.55% in the US and increased from 4.13% to 4.17% in Europe. This measures the proportion of loans trading below 80c, and a decline is a forward-looking indicator that suggests improving sentiment towards leveraged loans. FAIR’s July factsheet notes the potential impact on European and US leveraged loan indices from issues at Altice Group.

Significant overcollateralisation headroom

The overcollateralisation tests continue to leave significant headroom before a breach would kick in and divert cash flows away from CLO Equity tranches. As an approximation and assuming a 70% recovery rate in the event of default, we estimate that a c.13% cumulative default rate would be required before the 4.0% overcollateralisation threshold was breached. This is an indicative calculation based on the most recent weighted-average overcollateralisation cushion of 4% divided by the 30% loss from each default.

FAIR’s ‘GFC scenario’ models a gross return of 6% based on NAV and 11% based on the share price, as at 31 July 2023.

FAIR’s CLO equity assets have consistently demonstrated stronger credit performance than the broader CLO market, which in turn has significantly outperformed other corporate debt categories on returns and default rates. There is additional de-risking via a shareholder-friendly structure.

Liberum view

Distribution momentum is strong and leveraged loan indices have performed well over the past several weeks. Given that the US CLO equity portfolio’s mark-to-market valuation stands at a median 34%, de-risking is built into the valuation and there is potential for valuations to improve.


FAIR’s shares have been amongst the best performers over the past year with the 27% share price TR ranking third amongst alternative funds (ex-3i). We believe the shares continue to present attractive value given the underlying strong distributions, and the potential for higher US CLO equity valuations.


FAIR’s share repurchase programme, in place since last October, has driven a significant reduction in its bid-ask spread in absolute terms and relative to peers. We believe it is attractively positioned compared to most peers and that the relative discount is not justified, in most cases.

[cwa1] 16/8/2023 06:24

Pretty solid monthly permormance?

16 August 2023

FAIR OAKS INCOME LIMITED (the "Company")

Monthly Announcement of Unaudited Net Asset Value

As at the close of business on 31 July 2023 the estimated unaudited Net Asset Value of the Company's Shares was as follows:


Fund Name NAV Monthly Performance
Fair Oaks Income Limited
Realisation Shares USD 0.6050 2.68%
------------ --------------------
Fair Oaks Income Limited
2021 Shares USD 0.5975 2.38%

[cwa1] 15/8/2023 09:27

It's that time again:-

DIVIDEND DECLARATION



Dividend for Quarter Ended 30 June 2023



The Directors of Fair Oaks Income Limited have declared that an interim dividend will be payable as follows in respect of the quarter ended 30 June 2023 in respect of the Realisation and 2021 Shares:



Ex-Dividend Date: 24 August 2023



Record Date: 25 August 2023



Payment Date: 21 September 2023



Dividend per Realisation Share: 2.00 US cents per share



Dividend per 2021 Share: 2.00 US cents per share



The default payment for dividends remains in US Dollars however, dividends are now capable of being paid in Sterling provided that the relevant shareholder has registered to receive their dividend in Sterling under the Company's Dividend Currency Election. A copy of the Dividend Currency Election form, which should be sent to Link Group, 10th Floor, Central Square, 29 Wellington Street, Leeds, LS1 4DL when completed can be found on the Company's website at

[cerrito] 27/6/2023 21:16

Even though the shares traded at a 15pc discount to NAV at end May, given that they think CLO 's are very cheap I ask myself when FAIR think it better to invest in new CLO' s rather than buy back shares.

[bluemango] 23/6/2023 22:35

Holding too; not buying nor selling.

Not sure the 'storm' description is merited, but there seems to be no relatively safe high yields around right now, so it's a matter of keeping a diversified portfolio and sitting it out across all sectors, imo.

[cerrito] 23/6/2023 21:44

I see that Moodys has issued a warning about the private credit market signalling funds managed by Ares and Owl Rock.

The name Ares rang a bell and I checked on the latest FAIR fact sheet. It has USD18m of a 2015 Ares deal with an equity position
with a 30pc valuation. Moodys were mainly concerned about loans made in 2020 /1 but I guess some of these may have been inserted into the 2015 deal. Interestingly the cushion on this deal at 1.09, a big detioriation from the 2.27 at end February and 1.38 at end of March. There does seem to be something odd here as the total weighted average cushion for the whole FAIR portfolio has detioriated far less since February - from 4.46pc to 4.12pc.
They have a small mezzanine position in an Owl Rock deal.
I feel we are about to enter into a storm despite the upbeat comments on defaults by the managers of VTA, which I also hold, as well as FAIR. I note the comment from FAIR in recent months that CLO:s are underpriced as well as the discount, which despite the buybacks are at a high level compared to the last 3/4 years. I also note that this April's quarterly distributions were 3.3pc per share ie a 26.7 pc dividend yield based on the share price.
All in all I am not buying more FAIR or VTA but not selling either.
Any of you more adventurous??

[stemis] 08/6/2023 16:37

Who was the big shareholder voting against the directors?

[tag57] 08/6/2023 16:03

Couple of directors lucky to keep their jobs after the AGM

[a1samu] 25/5/2023 16:15

xd 1.6.23 pd 30.6.23 us $ 1066.02

[cwa1] 23/5/2023 10:38

DIVIDEND DECLARATION



Dividend for Quarter Ended 31 March 2023



The Directors of Fair Oaks Income Limited have declared that an interim dividend will be payable as follows in respect of the quarter ended 31 March 2023 in respect of the Realisation and 2021 Shares:



Ex-Dividend Date: 01 June 2023



Record Date: 02 June 2023



Payment Date: 30 June 2023



Dividend per Realisation Share: 2.00 US cents per share



Dividend per 2021 Share: 2.00 US cents per share



The default payment for dividends remains in US Dollars however, dividends are now capable of being paid in Sterling provided that the relevant shareholder has registered to receive their dividend in Sterling under the Company's Dividend Currency Election. A copy of the Dividend Currency Election form, which should be sent to Link Group, 10th Floor, Central Square, 29 Wellington Street, Leeds, LS1 4DL when completed can be found on the Company's website at

[cerrito] 21/5/2023 15:01

cbscb
Sorry I do not have that anymore.
I hope you enjoy reading him as much as I do.
I do not have the courage to buy more here and a 60c share price this year or next would be a very
pleasant surprise.
Both VTA and Fair note defaults are lower than expected, which is correct.
That said defaults are a lagging indicator and we need to see what happens in the famous recession as well as any repercussions of tightening landing standards. .
I do not understand what the impact will be of tighter lending. I note Fair have said so far no impact.
I do not see myself selling either.
Ps
For those looking to get into Fair and needing a CLO 101 there is a good introductory 15 minute video on the Oaktree site.
Pps
Too bad FAIR do not do investor webinars.

[scbscb] 20/5/2023 10:03

Cerrito, Could you please paste the risks raised in the John Authers Points of Return that you mention. I was not subscribed to Points of Return on the 17th, I have since subscribed. Thank you

[cwa1] 17/5/2023 09:12

Courtesy of davebowler on the VTA board...

Liberum on FAIR-

Default rates remain below expectations
Analyst: Shonil Chande

Mkt Cap £156m | Share price $0.48 | Prem/(disc) -17.9% | Div yield 16.7%

Event

Fair Oaks Income's NAV per share at 30 April 2023 was $0.5847, representing a total return of 1.1% in the month (+5.7% YTD). Default rates continue to be significantly lower than the forecasts for 2023 issued at the end of 2022. The default rate in the US remained stable at 1.3% while in Europe it rose from 0.4% to 0.6% in April. The distressed ratio in the US remained at 8.7% and in Europe it dropped from 6.4% to 6.1%. CLO valuations continue to lag other assets, potentially as a result of investors modelling unduly negative market scenarios.


Liberum view

The resilience in default rates is notable and challenges the assumptions made in company models to calculate the NAV. The company points out that in early 2020, the median price of the Master Fund's US CLO equity investments fell from 67 cents to 30 cents based on predictions of increasing loan defaults due to the pandemic. However, the median price recovered to 63 cents by spring 2021 when it became clear that default rates would not increase as expected. Today, the median price of the same investments is 32 cents, indicating once again a substantial recovery potential in the NAV if default rates continue to remain below projections.

We continue to be Buyers of the fund with a target price of $0.60 (+25% upside from current share price)

[cerrito] 17/3/2023 08:19

As a holder of both VTA and Fair, I read this morning's John Authers Points of Return with much interest. I suggest all VTA and Fair holders read it.
I am not quite sure what the implifications for both will be but I am having difficulty finding anything positive.
Logically I should sell but am put off by the wide bid/offer spread.
Be interesting to see what we are told in the April monthly report when things will be a bit clearer.

[euameus] 24/2/2023 22:36

You are correct. My previous focus was on the loans held by each CLO, as well as their average price, which I had assumed to be a reliable proxy for quality given that they did not appear to be trading at stressed levels. However, looking at Page 6, I noticed a range for the average cost of financing the loans within each CLO, ranging from 1.52% to 2.14%. As a result, I infer that for a similar loan portfolio, a lower cost of funding would likely lead to higher distributions generated by the CLO, potentially justifying a higher CLO price in Column 2. This consideration could also explain the disparities in CLO equity prices. I also observed on Page 4 that some of the investments are rated CLO notes, which are more senior, likely accounting for their higher valuations compared to the CLO equity shown on Page 3.

[grahamg8] 24/2/2023 17:54

Euameus. I think remarkably we could both be right.

I take it you are referring to the table on page 4, column 11. The "weighted average collateral bid price" is indeed 94.3%. I take this to be the normal market trading price that FAIR would buy at. However the "current market valuation" is in column 2 and is currently (31/1/23) 83.1%, range 69.7 to 108.9% - hence my comment about fluctuation. I take this to be the discounted value that their valuers suggest they would be able to sell at. That's quite a spread, but perhaps not unreasonable given that these loans in the main just don't trade - not that I have the odd $100m ready to go shopping with.

So in my view FAIR have hidden value as they should get most of the loans repaid at par or thereabouts.

[euameus] 23/2/2023 09:17

I am not sure that loan valuation is correct. The valuation of the CLO investments and the average price of the loans in each CLO is also is available in the monthly factsheet. As far as I can see the average price of the loans in the CLO equity investments is 94.3c, not 80c?
hxxps://www.fairoaksincome.com/~/media/Files/F/Fair-Oaks-IF/Fair%20Oaks%20Income%20Fund%20-%20Jan-23.pdf