Fair Oaks Income (FAIR), which seeks exposure to US and European CLOs or other vehicles and structures which provide exposure to portfolios consisting primarily of US and European floating-rate senior secured loans and which may include non-recourse financing, reported annual results to 31 December 2020. We note that the NAV and share price generated a total return of -8.3% and 1.0%.
‘Expectations of increased loan defaults and downgrades and these impacted CLO equity and debt valuations’
FAIR’s chairman, Professor Claudio Albanese, noted:
“CLOs were not immune to the unprecedented market volatility experienced by all credit assets in March 2020. The economic slowdown caused by the restrictions imposed to mitigate the impact of COVID-19 led to expectations of increased loan defaults and downgrades and these impacted CLO equity and debt valuations. A high level of uncertainty as to the effectiveness of government intervention kept CLO debt and equity valuations under pressure in the period between March and May. The Company benefitted from a quick and effective risk reduction in the Master Fund, which took advantage of the early market dislocation to build a high-quality portfolio of primarily European BB-rated CLOs at attractive prices, offering more resilience and high risk-adjusted returns. After generating a negative total return during the first half of the year, the NAV increased in the second half, resulting in an -8.3% performance for the full year. Total returns for the year for the JP Morgan US High Yield index, US Leveraged loan index and Post-Crisis CLOIE B index compared to the Company’s NAV were:
Total returns in 2020 total return
- JP Morgan US High Yield index +5.2%
- JP Morgan US Leveraged Loan index +3.2%
- JP Morgan Post-Crisis CLOIE B index +6.2%
- FAIR’s NAV -8.3%
All of the Master Fund II’s CLO equity and debt investments made their scheduled distributions in 2020. The company declared 0.70 US cents per 2017 Share dividends in respect of January and February 2020 but, as detailed below, in April 2020 the board resolved to suspend dividends in light of uncertainty caused by the COVID-19 pandemic. In July 2020, the company resumed the payment of dividends, on a quarterly basis and at a variable rate, and declared a 1.50 US cents per 2017 Share dividend in respect of the quarter ending June 2020. A dividend of 2.20 US cents per 2017 Share dividend in respect of the quarter ending September 2020, was declared in October 2020. The dividend yield for 2020 was 9.4% of the December closing mid-share price. Subsequent to the year-end, a dividend of 2.50 US cents per 2017 Share in respect of the quarter ending December 2020 was declared in February 2021.”
FAIR: Fair Oaks Income results reflect difficult year for CLO market