High-yielding corporate debt fund Fair Oaks Income (FAIR) will switch its reporting currency from dollars to euros and cut its 2 US cents quarterly dividend to 1 euro cent which will reduce its base yield to 10% from 17% currently. There will also be a 1 for 10 share consolidation.
The £186m investment company said the moves followed a review in response to changes in its portfolio and the collateralised loan obligation (CLO) market in which it invests. Engagement with its leading shareholders indicated broad support for the measures, it said. The shares slid 5.8% to 42 US cents, a 11.5% discount to their latest net asset value of 47.4 cents.
Chair Richard Burwood said the move to the euro was logical given most of the portfolio was now euro-denominated and more diversified across CLO debt and equity positions. “It removes approximately 40 basis points of annual hedging costs and aligns distributions with the currency of both the portfolio and a significant percentage of the investor base.”
Fund manager Fair Oak Capital said the US and Israeli war against Iran had added to the strains on debt markets following concerns over the ability of software firms to service their loans if revenues fell in response to low-cost chatbots and artificial intelligence tools. However, its exposure to both was limited.
It said: “Recent increases in the leveraged loan market distress ratio, from low levels, have been largely driven by ongoing concerns in the software sector particularly in relation to potential AI-related disruption. Over February, the average bid loan price declined from 95.7c to 94.6c in the US and from 95.9c to 95.2c in Europe. Year-to-date, software has returned -7.01% in Europe. European loans have continued to prove more resilient than their US counterparts, reflecting lower average software exposure of approximately 10% in European CLOs compared to 15-16% in US BSL CLOs.”
The manager added: “Moving into March, geopolitical tensions escalated following US and Israeli strikes on Iran, reigniting conflict across the Middle East. The resulting volatility in energy markets has contributed to a more cautious tone across risk assets, with European loan prices declining further to 94.4c as at 10 March. Primary CLO issuance is expected to moderate in the near term as market participants assess the broader implications for credit markets. However, direct exposure within CLO portfolios to issuers materially affected by the Iran conflict remains limited, and such periods of market dislocation may create opportunities for constructive portfolio rotations and risk mitigation.”
Our view
James Carthew, head of investment company research at QuotedData, said: “This is a good set of proposals from Fair Oaks Income. Over the past decade, the company has paid out very high level dividends but has seen a steady attrition of NAV (smoothing for the effects of COVID). The annualised net asset value return in sterling has been a very attractive 9.8%. Resetting the dividend to about 10% of NAV seems very sensible to me and supports a shift towards higher ranking (less risky) parts of the CLO structure. The shift from dollars to euros better represents the reality of the portfolio.”
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