Fair Oaks Income Limited (FAIR) has reported a robust set of annual results for the year ended 31 December 2024, with both its 2021 shares and realisation shares delivering strong double-digit total returns and dividend yields well above the broader credit market.
The trust’s NAV total return for the 2021 shares came in at 14.91%, up from 12.98% in 2023, while the realisation shares returned 17.35%, compared with 13.82% the year before. These returns outpaced high-yield and loan benchmarks, with the JP Morgan US leveraged loan index returning 9.43% and the high yield index gaining 8.94%.
Share price performance and discount tightening
The market capitalisation at year-end stood at US$227.2m, split between US$203.7m of 2021 shares and US$23.5m of realisation shares. The 2021 shares ended 2024 at US$0.5400, down slightly from US$0.5500 the year prior, while realisation shares edged up to US$0.5710 from US$0.5700.
Importantly, both share classes saw a significant narrowing of discounts to NAV. The 2021 shares traded at an average discount of just 1.5% during 2024, markedly lower than the 11.7% seen in 2023. Realisation shares saw a similar improvement, with the average discount narrowing to 0.7% from 4.3%. This appears to reflect improved sentiment, aided by a continued buyback programme. The adviser also reinvests 25% of management fees when shares trade below NAV.
Dividend yield and cash flow strength
AIR maintained its annual dividend at 8.0 US cents per share, representing a 14.8% yield based on the year-end price of the 2021 shares. Distributions were fully covered by income generated from the Master Funds’ portfolio, which benefited from a low annualised default rate of 0.37%, well below the broader market average of 1.72%. All CLO equity and debt positions made their scheduled payments, suggesting a strong degree of portfolio resilience and strong asset selection by the manager.
Portfolio quality and outlook
At year-end, the portfolio comprised 15 CLO equity and 11 mezzanine positions, offering look-through exposure to 1,268 loan issuers and 15 CLO managers. The portfolio remains heavily weighted to subordinated CLO equity, accounting for 84.6% of its market value, and continues to emphasise exposure to first-lien, senior secured loans.
CLOs with embedded ESG-related investment criteria now represent 77.9% of all equity positions, a notable increase reflecting the adviser’s focus on sustainable investing practices. CLO equity test headroom remained a healthy 4% above threshold, with default rate buffers exceeding 14%, providing strong protection against future cashflow diversions.
The projected gross return on the portfolio’s current positions is 22%, based on modest default assumptions, suggesting continued income-generating capacity for 2025 and beyond.
CLO market backdrop: positive technicals and improved liquidity
The CLO market was buoyant in 2024. In the US, primary CLO issuance hit US$202bn, with refinancings and resets reaching a record US$307bn, as improving loan market conditions and strong investor demand supported activity. Net CLO issuance, however, remained modest at US$55bn, helping tighten spreads across the capital structure.
In Europe, gross CLO issuance also reached a new high of €48bn, with resets and refis totalling €34bn. Net supply in both regions remained constrained, supporting pricing.
Growing demand for floating-rate assets – spurred by expectations of higher-for-longer interest rates and geopolitical risks – has helped fuel the tightening of CLO spreads, and investor appetite remains strong. US CLO ETFs alone added US$15.8bn in assets during the year, and AAA-rated CLO spreads tightened despite record issuance.
Manager cautious optimistic
Manager Fair Oaks Capital notes that market conditions remain supportive for CLO equity, particularly given sustained investor demand, floating-rate appeal, and a low maturity wall. With refinancing activity reducing near-term default risk and capital structure optimisation opportunities growing, it thinks the trust is well-positioned to capture upside in both income and capital.
[QD comment MR: Fair Oaks Income continues to carve out a niche as one of the better-performing CLO equity-focused vehicles, offering investors a decent yield and tight discount. The narrowing discount to NAV, fully covered dividend, and strong relative performance versus credit benchmarks likely appeal to shareholders. The outlook looks positive, with tailwinds in both the US and European CLO markets. The manager’s focus on high-quality loans appears to be proving its worth in a still uncertain macro environment.]
