Fair Oaks Income (FAIR), a £219m investor in high-yield corporate debt known as collateralised loan obligations (CLO), has proposed removing the 2028 maturity date of the master fund through which it invests.
Responding to market changes, which had seen CLOs set for longer periods with terms frequently reset and extended, the Guernsey feeder fund said it was no longer appropriate for the Master Fund III in which it invests to have a fixed life ending in three years’ time.
It has proposed turning the master fund into an “evergreen” fund with no fixed life and with investors able to withdraw up to 20% of their capital every four years.
This would enable the master fund to avoid having to liquidate attractive portfolios ahead of a wind-up as well as the costs of setting up a new master fund.
In a reorganisation four years ago when the previous fixed life Master Fund II was reaching maturity, the company issued a new class of 2021 shares for investors extending their involvement in the new III fund, while offering separate realisation shares for the 13% of shareholders who wanted to remain in fund II.
This dual structure would be unnecessary under an evergreen structure that requires shareholder approval at a meeting yet to be arranged. The continuation vote set for 2028 will also be brought forward to this year.
“The board and the investment adviser believe that this flexibility has the potential to enhance returns for Master Fund III, and that it would directly align with current market developments and should position Master Fund III (and accordingly the company) to maximise opportunities from the growing reset activity in CLOS,” Fair Oaks Income said.
The company said there would be no changes to dividends backing its high 15% yield, buyback policies that help keep its shares close to their net asset value or the fund manager’s commitment to re-invest a quarter of its fees into the 2021 shares if they trade below NAV.
The proposal came alongside half-year results that showed the 2021 shares made an underlying 1.2% investment return in the first half of the year, down from 5.8% a year ago, while the realisation shares made just 0.2%, down from 6.8%. Over three years the 2021 shares have returned a total of 59.1%, according to the Association of Investment Companies.
Our view
James Carthew, head of investment company research at QuotedData, said: “Fair Oaks’ plans for four-yearly 20% exit opportunities and the shift to an ‘evergreen’ structure look sensible to me. While the three-year performance figures reflect the adjustment that the debt market had to make to rapidly rising interest rates over 2022, both longer-term and shorter-term returns still look healthy. Nevertheless, it is worth bearing in mind that the 15% dividend yield is considerably higher than the total return achieved over the past 12 months, so there is an element of capital return in there. There has been a modest pick-up in loan defaults recently and it is worth keeping an eye on the fallout from that.”
