Fair Oaks Income announced annual results for the year ended December 2022.
The company generated share NAV and share price total return of -0.9% and -6.5% respectively in 2022 with shares closing out the year trading at a discount to NAV of -14.4%. Its realisation share NAV and share price generated a total return of +0.5% and -5.9% respectively. The company’s realisation shares traded at a discount to NAV of -1.7% By comparison, the total return for the JP Morgan US Leveraged Loan index in 2022 was +0.06%. In the same period, the JP Morgan US High Yield total return was -10.57% while the JP Morgan CLO B rated index returned -6.39%.
Commenting on the results and the outlook for Fair Oaks, the investment managers noted:
“The active management of the portfolio was instrumental to allow the master funds to de-risk while taking advantage of tactical market opportunities in 2016 and 2020, which generated efficient risk-adjusted and asymmetric returns. Going forward we expect this dynamic approach to continue to benefit the master funds as volatility increases in broader markets. Despite the impacts of the ongoing war in Ukraine, the challenges of high inflation, rising rates and the bank failures seen in March 2023, we believe that the company and the master funds are well positioned to generate attractive risk-adjusted returns in 2023:
- Stable and attractive dividend yield: current dividend yield of 16.3%.
- Interest rate expectations: Fed and ECB rate hikes will continue to support investor demand for floating rate assets, potentially supporting CLO liabilities. The potential for lower CLO financing rates will support new CLO equity investments and the optimisation of the capital structure of existing CLO equity investments.
- Existing, high-quality portfolio and strong sourcing ability: CLO new issue supply in 2023 could be significantly below levels seen in 2022 and 2021, generating a demand-supply imbalance in CLO equity and debt given increasing demand for floating rate assets. The master funds benefit from strong, long-term relationships with CLO managers, including preferential access to Fair Oaks-managed CLOs.
- Structural advantages: Supported by the master funds rigorous valuation policy, fixed life of the underlying master funds, and discount management provisions, including quarterly reinvestment of 25% of management fees if the company does not trade at or above NAV. The company will also continue to implement its buy-back program, with the objective of reducing the current discount to NAV and bid-offer spread.”
Fair Oaks Income re-establishes strong dividend