Fair Oaks Income Fund

Transcription

1 18 February 2015 Investment Companies Company Update CLOs (LSE: FAIR LN) Fair Oaks Income Fund Price / NAV ( ) $1.03 / $0.97 Premium (range) 5.8% (2.0% to 9.3%) Market cap $171.1m Yield estimate* in excess of 8.2% Master Fund end of life 31 May 2019 Objective: attractive risk-adjusted returns, principally through income distributions. Feeder fund into Fair Oaks Income Fund LP (the Master Fund ), which invests in CLOs backed by US and European floating-rate senior secured loans, which may include non-recourse financing. Target net total return (p.a.) 12-14% Listing Domicile LSE Specialist Fund Market (SFM) Guernsey Fund launch 12 June 2014 Investment Advisor Fair Oaks Capital Ltd FAIR AMC 1% of NAV (0.25% invested in shares) Master Fund AMC Effectively 0% (see p11) Master Fund perf fee Dividend frequency Company gearing Master Fund gearing Discount control Master Fund end of life 15% of returns once initial investment plus 7% IRR paid out Monthly nil (max 20% of NAV) nil (max 20% of NAV) Cont vote and buybacks 2019 (can be extended for two additional 1 year periods) FAIR continuation vote May 2019 and every two-years thereafter FAIR price, NAV, NAV + divis since inception, $ 1.10 NAV + dividends NAV Price Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Source: Bloomberg. Data as of 17 February *CFE dividend est = in excess of 8.5 cents = 11 x 0.7 cents + larger twelfth see page 12 **CLO = Collateralised Loan Obligation see page 8 Monica Tepes, CFA Investment Companies Analyst mtepes@cantor.com Safe assets, high leverage, 8%+ starting yield Fair Oaks Income Fund ( FAIR LN ) represents the return of Miguel Ramos Fuentenebro to the CLO sector. He left Carador Income Fund (CIFU LN) in May 2012, having delivered a NAV return of 25% p.a. over four years. He is now a founding partner at an independent asset management firm, affording him the most investment flexibility and the greatest incentive. Mid-teens returns from top ranking corporate debt, but in highly leveraged structure The Company targets a net total return of 12%-14% p.a. over the next five years, mainly in the form of income distributions (current estimated yield is 8%+). The returns are generated by investing primarily in CLO** income notes. This is, effectively, equivalent to investing, in a highly leveraged manner, although without mark-to-market risk, in a portfolio of senior secured loans, arbitraging the spread between the coupons on the loans and the cheaper cost of borrowing. Illustration of how, in effect, returns are generated for notional $100m investment Value $ in /out % Notes Portfolio of senior loans (gross assets) $1,000m +$49m 4.9% Average coupon on FAIR portfolio (LIBOR %, 30 Jan 2015) Borrowings (90% LTV) $900m -$22m 2.4% Average interest on FAIR CLO debt (LIBOR %, 30 Jan 2015) Equity (FAIR) $100m +$25m 25.0% Spread between asset income and borrowing cost (c.2.5% on $1bn) CLO fees paid by equity (est) -$3m 0.3% Management + structuring fees Master Fund + FAIR fees (est) -$2m Management + performance fees Equity income assuming no defaults $22m 22% p.a. Est equity total return (after defaults*) 12-14% p.a. over life of CLO *See page 2 for historic defaults and portfolio sensitivity. Source: Fair Oaks Income Fund, CFE Investment Companies Returns driven by loan default and recovery rates Typically there is little interest rate risk, the main drivers of returns being the rates of defaults and recoveries in the loan portfolio. Generally, defaults are relatively low and recoveries relatively high, given that the loans are the safest form of corporate debt they rank at the top of a typical corporate structure and are collateral-backed. Also, the CLO covenants do not require a mark-to-market of the loans, allowing the CLO to withstand loan price volatility by not being forced to sell any loans. Independent manager, competitive advantages over peers An important differentiator of the Company is the fact that the Manager is independent from the CLO issuers, eliminating any conflicts of interest. Investments are also made with more nimble CLO managers, via controlling positions. This makes possible fee negotiations that can result in significant savings and allow the Company to choose the optimal time to call a CLO. And not least, part of the management fee is paid in shares and the performance fee is back-end-loaded. Portfolio at a glance: FAIR investment portfolio key metrics, 30 January 2015 CLO investments 7 (95% USD) Wgt Average Rating B/B+ Issuers / industries 801/ 41 Wgt Avg Asset Spread (1) $ 3-month LIBOR % Top 10 issuers 6.0% Wgt Avg Cost of CLO Financing (2) $ 3-month LIBOR % (1) Based on loan par value weighted by the Master Fund's proportional ownership. Source: Intex, latest available trustee reports or manager reports (2) Excludes investment in mezzanine CLO notes. Based on stated coupons. Source: Fair Oaks Income Fund This is a marketing communication. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Please see important regulatory disclaimers and disclosures on page 14.

2 Fair Oaks Income Fund 18 February 2015 IRRs. Defaults. Recoveries. IRRs. Defaults. Recoveries. The main drivers of returns for the CLO income notes are the rate of default in the underlying portfolio of loans and the recovery rate on these defaults. IRR sensitivity FAIR portfolio IRR sensitivity to defaults in senior loan portfolio (assuming 70% recovery rate) The Manager estimates the portfolio break-even rate at 24%. This is the 5-year cumulative rate which would result in a zero portfolio IRR. This assumes a 70% recovery rate (vs. historical average of 80% (see chart below) and does not include the offsetting impact of reinvesting loan prepayments at higher spreads in higher default scenarios. A higher/lower assumed recovery rate would translate into a sensitivity curve that is less/more steep. Default rates US leveraged loans default rate (lagging 12-months) Source: Fair Oaks Income Fund (Source: Intex) US leveraged loans default rate (lagging cumulative 5-years) 12% 10% % of loans (by par amount) % of issuers Average (by par amount) 12% 10% 30% 25% 5-yr cumulative default rate Average (13.4%) FAIR break-even rate assuming 70% recovery rate 30% 25% 8% 8% 20% 20% 6% 6% 4% 4% 15% 15% 2% 2% 10% 10% 0% 0% '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 Source: Standard and Poor s LCD and S&P/LSTA Leveraged Loan Index 5% 5% Source: Standard and Poor s LCD and S&P/LSTA Leveraged Loan Index, Fair Oaks Income Fund Recoveries US Senior Loans recovery rates As Senior Loans rank at the top of the typical corporate structure and are backed by collateral (see page 6), recovery rates are relatively high Source: Moody s 2 Cantor Fitzgerald Europe Research

3 Historical returns and interest rate sensitivity Fair Oaks Income Fund 18 February 2015 Historical returns and interest rate sensitivity CLO income notes returns CLO income notes cash returns have proved very resilient. While pricing of the income notes and the underlying loans was volatile during the credit crisis, the CLO structure remained robust as CLO covenants do not require a mark-tomarket of the loans (see page 9) Leveraged Loans default rates and CLO income notes returns While payments to the income notes were reduced or stopped as defaults rose during the credit crisis, distributions were restored (often at a higher rate) once the CLO covenants came back into compliance Source: Citi Investment Research and Analysis and Intex Little interest rate sensitivity CLO income notes returns come from arbitraging the spread between the interest earned on the portfolio of senior loans and the cheaper cost of borrowing against these loans. However, some interest rate risk exists due to the LIBOR floors on some of the portfolio loans. These are minimum absolute levels of interest that a loan must pay if its floating rate (LIBOR + spread) is below this level. This means that, as LIBOR rates rise, the income from these loans only starts going up once these floors have been breached. As the CLO s cost of borrowing does not have such floors, this means that, up to a point, borrowing costs go up while loan coupons do not, reducing returns to the income notes. *The sensitivity analysis shows the sensitivity of returns to increases above those expected: i.e. the forward interest rate curve is taken into account in FAIR s base case returns FAIR portfolio returns sensitivity* to changes in interest rates Source: Fair Oaks Income Fund (Source: Intex.) Cantor Fitzgerald Europe Research 3

4 Fair Oaks Income Fund 18 February 2015 The portfolio The portfolio Fair Oaks Income Fund portfolio, 30 January 2015 (in order of investment date) The Company invests primarily in CLO income notes. However, the Company can also invest in the debt notes of the same CLO, the combination of equity and debt being equivalent to a less leveraged CLO equity investment. Asset Name Type of asset Manager Currency Par Amount ($m) % of portfolio Investment announced Manager estimated IRR Harvest CLO VII Equity Notes 3i Debt Management EUR /06/2014 n/a OZLM VIII Debt Notes (B-rated) Och Ziff USD /08/ % 12.0% Arrowpoint CLO Equity Notes Arrowpoint Partners USD /08/2014 Arrowpoint CLO Debt Notes (B-rated) Arrowpoint Partners USD /08/ % 15.0% Covenant Credit Partners CLO II Equity Notes Covenant Credit Partners AMMC CLO 15 Equity Notes American Money Management Corp. Allegro CLO II Equity Notes Axa Investment Managers USD /10/ % 17.0% USD /11/ % 16.5% USD /12/ % 18.0% Total Source: Fair Oaks Income Fund The typical maturity of senior loans is 5-7 years. However, as they can be paid back at any time without penalty, prepayments rates tend to be high, resulting in effective loan lives of years on average. Top 10 issuers, 30 January 2015 Issuer Industry Country S&P rating % gross portfolio 1 Community Health Systems Health Care US B First Data Financial Intermediaries US B Asurion Property & Casualty Insurance US B ienergizer Limited Publishing UK B Gardner Denver Industrial Equipment US B Advantage Sales & Marketing Business Equipment & Services US B American Rock Salt Nonferrous Metals / Minerals US B Albertsons Food / Drug Retailers US B Fortescue Metals Group Ltd Nonferrous Metals / Minerals US BB Windstream Telecommunications US BB Total 6.01 Total number of issuers 801 Portfolio weighted average rating B/B+ Portfolio weighted Average Asset Spread (1) USD 3m LIBOR % Portfolio weighted Average Cost of CLO Financing (2) USD 3m LIBOR % Defaults in portfolio since IPO zero (1) Based on loan par value weighted by the Master Fund's proportional ownership. Source: Intex, latest available trustee reports or manager reports (2) Excludes investment in mezzanine CLO notes. Based on stated coupons. Source: Intex Source: Fair Oaks Income Fund Limited. 4 Cantor Fitzgerald Europe Research

5 Portfolio breakdown Fair Oaks Income Fund 18 February 2015 Portfolio breakdown The portfolio loans are diversified across 41 industries Top 10 industry exposures*, 30 January 2015 (%) Business Equipment & Services 10.8 Health Care 9.0 Chemical & plastics Electronics /Electrical Leisure Goods / Activities / Movies Industrial Equipment Telecommunications Retailers (except food & drug) Financial Intermediaries Publishing *Based on par value of loans in gross portfolio Source: Fair Oaks Income Fund Limited. Geography breakdown*, 30 January 2015 Currency breakdown*, 30 January 2015 Other 1.0% Netherlands 1.0% Germany UK 1.2% 1.8% USD 95% EUR 5% US 92.5% 0% 25% 50% 75% 100% *Based on par value of loans in gross portfolio Source: Fair Oaks Income Fund Limited. *Based on par value of loans in gross portfolio Source: Fair Oaks Income Fund Limited. The average rating of the underlying loans is B/B+ Rating breakdown*, 30 January % 50% 54% 40% 30% 20% 10% 0% 22% 12% 5% 5% 2% 0% 0% 0% BB+ BB BB- B+ B B- CCC+ CCC NR *Based on par value of loans in gross portfolio Source: Fair Oaks Income Fund Limited. Cantor Fitzgerald Europe Research 5

6 Fair Oaks Income Fund 18 February 2015 Senior secured loans and CLOs: the basics Senior secured loans and CLOs: the basics Senior secured loans The size of the US Leveraged Loans market is currently in excess of $1.7tn New issuance in 2014 was $533bn Source: CVC Credit Partners Senior secured loans (also known as Leveraged loans or Bank loans), are corporate debt securities of sub-investment grade issuers that: Pay a floating rate of income Rank above all other debt obligations Are secured by collateral such property, equipment, inventory, accounts receivable Have relatively low default rates and high recovery rates (see points 2 & 3 above) Have typical maturities of 5-7 years. However, the borrower can pay back the loan at any time with no penalty, meaning prepayment rates can be high. CLOs Collateralised Loan Obligations ( CLOs ) are debt and equity notes (also called tranches) backed by a portfolio of Senior secured loans. The US CLO market is currently c.$390bn Illustration: CLO backed by Senior secured loans In 2014 a record $124bn was issued (235 CLOs from 106 managers), surpassing the pre-crisis record of $97bn in 2006 Source: Citi A typical CLO holds loans spread across industries Source: Fair Oaks Capital Historically, CLO debt tranches have had a very low rate of default S&P calculates the cumulative 20-year default rate at 0.4% (or 25 out of over 6,100 tranches) and the loss rate at 0.04% The debt tranches (senior and mezzanine): make up c.90% of the portfolio assets at CLO inception have different credit ratings pay floating rate of interest have first call (in order of seniority) on the portfolio income start getting their principal repaid (in order of seniority): with the proceeds of loan capital repayments once the CLO re-investment period has ended with loan coupon income otherwise due to the equity tranche if CLO tests are failed (see CLO covenants paragraph on next page) The equity tranche or the CLO income note (this is where FAIR mainly invests): makes up c.10% of the portfolio assets at CLO inception sits at the bottom of the financing structure receives the residual income after the interest on the debt tranches has been paid it is the first to absorb any losses (i.e. defaults in the underlying portfolio) 6 Cantor Fitzgerald Europe Research

7 Senior secured loans and CLOs: the basics Fair Oaks Income Fund 18 February 2015 CLO covenants To improve the security of the debt tranches, the equity tranche only receives income once the loan portfolio passes a collateralisation test (with loans valued at par) and an interest coverage test. In order to ensure these tests are met, the portfolio is actively managed. It is important to note that none of the covenants involve a mark-to-market of the loans, allowing the CLO structure to withstand market volatility. If any of the tests are failed, the CLO manager is not forced to sell any of the loans, but instead portfolio income is redirected from the income notes until they return to compliance. The diverted income is used to: to repay the debt tranches (in order of seniority), or to buy additional collateral for the debt tranches (the loans would generally be bought at a discount, as additional collateral would normally be needed in a weaker credit environment) CLO life cycle The Fair Oaks Master Fund life (5 years) has been designed to match the natural life cycle of a CLO. CLOs effective lives are normally much shorter than their nominal lives, as they begin to wind down as loan capital repayments start to be paid out after the end of the reinvestment period. The CLO will then generally be called (i.e. liquidated or refinanced) at the request of a controlling equity investor. Prior to the global financial crisis CLOs (now called CLO 1.0) generally had lives of years with an initial re-investment period of 5-7 years Post the global financial crisis, newly issued CLOs (called CLO 2.0) have shorter lives of years with an initial re-investment period of 2-4 years However, CLOs are generally called prior to maturity (generally 1-2 years after the end of the reinvestment period) because as the senior (lowest interest) tranches are being repaid, the cost of the CLO financing increases, reducing the spread for the income notes. The portfolio also becomes less diversified. Illustration: CLO tranches and cashflows assuming no defaults ASSETS (1) Initial value ($m) % Senior Loan Portfolio (Libor + 438bps 2 ) Loans held at cost no mark to market risk Loan maturities match CLO liabilities 1, % Annual interest paid ($m) 46.3 The average maturity of the debt financing of the CLOs in the FAIR portfolio is c.12 years However, the effective life of the tranches is generally much shorter as: (1) their principal starts to be paid down (in order of seniority) after the end of the CLO reinvestment period (2) their outstanding principal is paid back if the CLO is called Initial value ($m) % Annual interest paid ($m) Bonds & Income Notes issued by CLO (1) AAA LIBOR % % 10.8 AA+ LIBOR % % 2.8 A LIBOR % 80 8% 2.6 BBB LIBOR % 45 5% 2.4 BB LIBOR % 35 4% 2.7 B LIBOR % 20 2% 1.3 Management Fee (0.25%) 2.5 Income Notes Residual Income % 21.3 (1) 0.25% LIBOR rate assumed on both loans and liabilities. Annual cashflow analysis does not include impact of upfront structuring costs or any default losses in the portfolio. (2) Including the benefit of Libor floors for any loans that include such floors. Source: Fair Oaks Capital, CFE Investment Companies Cantor Fitzgerald Europe Research 7

8 Fair Oaks Income Fund 18 February 2015 The Investment Adviser: Fair Oaks Capital The Investment Adviser: Fair Oaks Capital Fair Oaks Capital Limited ( Fair Oaks ) acts as the Investment Adviser to the Company and the General Partner of the Master Fund. Fair Oaks is an independent firm established in October 2012 and focused on the global credit markets. Its two primary offices are located in London and New York. The owners of Fair Oaks and its principals include co-founding partners of Stone Tower Capital LLC and senior investment professionals of GSO Capital Partners LP / The Blackstone Group. Fair Oaks Capital Investment Team Professional Primary responsibility Qualifications Experience Miguel Ramos Global Structured Credit Fuentenebro and European Opportunities Partner & Co-founder W. Anthony Edson Global Structured Credit Partner & Co-founder and US Opportunities Roger Coyle Lead European Corporate Partner & Co-founder Credit Professional Ivona Smith US Corporate Credit, Focus on Special Situations Founded Structured Credit Group at GSO Founded Washington Square Investment Management Ltd whose team and funds were transferred to GSO in 2008 Responsible for launching the Carador Income Fund, the first London listed CLO fund, in 2006 Co-Founder of Stone Tower Capital LLC Hired majority of investment staff One of key architects of STC investment process Portfolio Manager for London-based CLOs of GSO/Blackstone Extensive experience of leveraged loans from buy-side, sell-side and rating perspective Involved in consolidation of the European CLO market Co-Founder of Restoration Capital Management Developed the firm s investment strategy and actively managed the portfolio Rob Crawford US Corporate Credit Extensive experience in origination and execution of M&A and financings on behalf of private equity firms Alban Senlis European Corporate Credit In charge of credit analysis and execution of private debt investments in Europe and responsible for portfolio monitoring and individual asset performance review at Ember Capital Structuring and execution of private equity investments in France for Groupama Private Equity 19 years: GSO/Blackstone Washington Square IM Morgan Stanley 15 years: Apollo Global Investors Stone Tower Capital HicksMuse Morgan Stanley 16 years: GSO/Blackstone JPMorgan Fitch Ratings 20 years: Restoration Capital Mgmt Tribeca Investments LLC Whippoorwill Associates Ernst & Young 20 years: IMB Development Corp Lincoln International Watch Hill Partners Goldman Sachs Bain & Co 5 years: Ember Capital LLP Groupama Private Equity PricewaterhouseCoopers Source: Fair Oaks Capital Track record Miguel Ramos Fuentenebro launched the Carador Income Fund (CIFU LN) in April 2006 while he was the founder and Managing Partner of Washington Square IM. He continued to manage the fund when GSO Capital Partners International LLP was appointed in place of Washington Square as Investment Manager of the Company on 13 June 2008 following the transfer of the key executives of Washington Square to GSO. He left GSO on 11 May Carador Income Fund (CIFU LN) under Miguel Ramos Fuentenebro management* 225 CIFU USD NAV total return (+25.3% p.a.) CIFU USD NAV capital return (+11.5% p.a.) Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec *CIFU inception to 30 April Source: Morningstar. 8 Cantor Fitzgerald Europe Research

9 Investment strategy and process Fair Oaks Income Fund 18 February 2015 Investment strategy and process Fair Oaks Capital Investment process Focus on credit quality, active origination, negotiation and ongoing management Focus on large, higher recovery, senior secured bank loans the credit quality of the borrowers is paramount Fundamental credit analysis of all underlying loans both at CLO origination and ongoing Scenario analysis the portfolio is stress-tested for different economic scenarios Strong relationships with all key participants in the loan and CLO markets (arrangers, managers, traders, research etc) Independent from CLO managers no conflicts of interest Seeking nimble CLO managers they have more investment flexibility (can exit underperforming loans) and the Company can hold controlling positions in the income notes of the CLOs they issue (see point below) Controlling positions allow active involvement in the CLO structuring, portfolio selection (remove lower quality loans), fee negotiation (can be a significant contributor to returns) and control call timing (call the CLO at the optimal time for the equity investors) Seeking to monetise the execution premium generated as a result of the Company s early involvement in CLO structuring and subsequent monitoring Actively originating investment opportunities, negotiating financing structures and exercising control positions Advantage of flexible investment policy regulatory changes have created challenges for investment vehicles with policies defined before the credit crisis; many credit investors continue to have artificial investment constraints, creating less competition for high quality illiquid assets Source: Fair Oaks Capital Cantor Fitzgerald Europe Research 9

10 Fair Oaks Income Fund 18 February 2015 About the Company and Master Fund About the Company and Master Fund The Company Fair Oaks Income Fund Limited (FAIR LN, the Company ) is a Guernsey-domiciled closed-end fund listed on the Specialist Fund Market (SFM) of the London Stock Exchange. The Company was launched on 12 June 2014 with an initial equity capital of $114.5m. A further $7.5m, $39.7m and $5.0m was raised via a placings on 27 October 2014, 16 February 2015 and 18 February 2015 respectively. The Board currently has authority to issue further shares, up to 200% of the number of shares issued at IPO. The Company is a feeder fund into the Fair Oaks Income Fund LP (the Master Fund ). The Master Fund The Master Fund is a limited partnership ( LP ) registered in Guernsey on 7 May At present the Company is the Master Fund s sole investor. Investment objective The investment objective both of the Company and the Master Fund is to generate attractive, risk-adjusted returns, principally through income distributions. The investment objective and policy of the Master Fund can only be varied with the consent of a minimum of 75% of the Limited Partners (as percentage of commitments). Both the Company and the Master Fund target an annual net total return of 12%-14% over the planned life of the Master Fund (i.e. five years) and it is expected that dividends will constitute the principal element of the return to the Company's shareholders. Investment policy The investment policy of the Company is to seek 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. The Company will implement its investment policy by investing in the Master Fund. Investment strategy and process See page 9. Master Fund investment restrictions The Master Fund has the following investment restrictions, which can only be waived with prior written consent of the Advisory Committee. Maximum 5% of gross assets (at time of investment) in any single corporate issuer; issuers of CLOs are not considered corporate issuers. Maximum 10% of gross assets (at the time of investment) in corporate issuers headquartered and operating principally outside the EU, US and Canada. Investments in publicly traded options, futures or financial derivatives will only be made for efficient portfolio management purposes in connection with an Investment, proposed Investment or Investments generally. No investments will be made in mortgage backed securities or asset-backed securities, other asset-backed obligations backed by mortgages or other non-corporate loans; but can invest in portfolios which may include corporate borrowers with substantial real estate holdings. 10 Cantor Fitzgerald Europe Research

11 About the Company and Master Fund Fair Oaks Income Fund 18 February 2015 The General Partner Fair Oaks Income Fund (GP) Limited, a company wholly-owned by the principals of Fair Oaks Capital, is the General Partner. Miguel Ramos Fuentenebro, Miguel Arraya and Chris Waldron are the GP Directors. They are responsible for managing the business affairs of the General Partner, which is responsible for managing the business affairs of the Master Fund and overall responsibility for the Master Fund s activities including its investment activity and performance. The GP Directors may delegate certain functions of the General Partner to other parties such as the Investment Adviser but not, for the avoidance of doubt, investment or divestment decisions. The investment adviser Fair Oaks Capital Limited ( Fair Oaks ) acts as the Investment Adviser to the Company. It also acts as the Investment Adviser to the General Partner of the Master Fund. See page 8 for more details. Fees The Company pays its Investment Adviser an annual fee of 1.0% of the Net Asset Value of the Company minus the net Management Fee suffered by the Company in respect of its investment in the Master Fund. This means that, in effect, the Company pays a single layer of management fees, equal to 1.0% of net assets. The Master Fund pays its General Partner a management fee equal 1.5% p.a. of the Master Fund NAV. However, the Company, as a Limited Partner with an initial commitment of $100m or more, is entitled to a rebate such that it pays a Management Fee of 1.0% p.a. The Master Fund will also pay the Founder Partner (who is owned by Fair Oaks Capital) a carried interest equal to 15% of cash available to be distributed (including after payment of expenses and Management Fees) after Limited Partners have received a Preferred Return of 7% p.a. The calculation of the Preferred Return threshold will be based solely on distributions and not on NAV calculations so the Master Fund will not pay any carried interest until its investors have realised the amounts drawn down for investments and their Preferred Returns. Fee reinvestment in shares The Investment Adviser has agreed to reinvest part of the fees received into Company shares as follows: 25% of the fees which it receives annually from the Company 25% of the Management Fee which the General Partner receives annually from the Master Fund in relation only to the Company s interest in the Master Fund The shares will either be issued at the prevailing NAV, or instead purchased in the secondary market should they be trading at a discount to NAV of 5% or more. NAV calculation and frequency The unaudited NAV is calculated as at the close of business on the last Business Day of every month and is normally be published within 10 business days. The Master Fund NAV is used as a basis for calculating the Company s Net Asset Value. Cantor Fitzgerald Europe Research 11

12 Fair Oaks Income Fund 18 February 2015 About the Company and Master Fund 12 Cantor Fitzgerald Europe Research Valuation of Master Fund investments The custodian of the Master Fund values the NAV independently of the GP and Advisor, using Priceserve (an independent third-party service, subsidiary of Bank of America) to value the portfolio investments. Currency hedging The Master Fund hedges its currency exposure to any investments that are not denominated in USD for the purposes of efficient portfolio management. Borrowings The Company will not have any borrowings except for short term borrowings not to exceed 20% of NAV for working capital and cashflow purposes. In the event where there is any short term borrowing, assets of the Company may be pledged against it. The Master Fund will not have any borrowings except for short term borrowings not to exceed 20% of Master Fund NAV except borrowing that is non-recourse to the Master Fund and is used to acquire portfolios of senior loans (i.e. borrowing that is embedded in Investments). The Master Fund s investment policy does not limit such non-recourse borrowings. Dividend policy The Company targets an annual net total return of 12%-14% over the planned life of the Master Fund and it is expected that dividends will constitute the principal element of the return to the Company's shareholders. The Company has a policy of distributing an amount in aggregate at least equal to the net income from investments which are received by the Company in the relevant financial year. The Company targeted a dividend in its first year of an amount at least equal to 5.0% of the issue price (on an annualised basis) and in respect of each year thereafter, 3 month USD Libor plus 6.75% of the issue price. In respect of the period from IPO on 12 June 2014 to the Company's year ended 31 December 2014, the Company paid a dividend of 4.25 US cents, representing an annualised yield of 7.7% of the IPO price and significantly ahead of the 5% target. At launch, the Company intended to pay quarterly dividends. However, subsequently the Board decided to change the frequency to monthly. On the basis of its current income projections, the Board plans to declare eleven monthly dividends of a minimum of 0.7 US cents per share and a larger twelfth interim dividend such that, in the opinion of the Board, substantially all net income generated by the Company in 2015 is distributed to shareholders. A first monthly dividend of 0.7 US cents (in respect of January 2015) has been declared and will be paid on 19 February 2015 (xd 5 February 2015). Discount management The Company has a continuation vote in May 2019 see Company continuation vote paragraph on next page. Additionally, the Board will give consideration to repurchases of shares in the event that the shares are trading at a discount to the NAV of 5% or more. However, the Company is not expected to have material cash to finance such a programme only to the extent that the Company has received distributions from the Master Fund.

13 About the Company and Master Fund Fair Oaks Income Fund 18 February 2015 Master Fund life The Master Fund has a fixed life of five years after the initial closing date (i.e. 31 May 2014), but may be extended for up to two additional consecutive one-year periods at the discretion of the General Partner. The Master Fund life has been designed to match the natural life cycle of CLOs see page 7. Company life The Company was set up with an unlimited life. However, a continuation vote will take place to coincide with the end of the Master Fund life (see below). Company continuation vote On or before 31 May 2019, being the planned end date of the Master Fund, the Company will propose to shareholders a Continuation Resolution. If the Continuation Resolution is passed, further continuation resolutions will be proposed every two years thereafter. If the continuation resolution is not passed, the Board will put forward proposals for the voluntary liquidation of the Company. Significant shareholders FAIR large shareholders (as at 12 February 2015) Shareholder % 1 GLI Finance Ltd* Axa Merseyside Pension Fund Seneca Investment Management Capita Financial Managers Smith & Williamson Brooks MacDonald Newton Investment Management 1.1 Total 67.4 Source: Bloomberg *Shareholding subject to a two year lock-up ending June Source: Fair Oaks Income Fund Cantor Fitzgerald Europe Research 13

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