Fair Oaks Income Limited Annual Report 2016

FY2016 Annual Report · Fair Oaks Income Limited
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FAIR OAKS INCOME LIMITED 

(FORMERLY FAIR OAKS INCOME FUND LIMITED)

ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2016

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Contents

Highlights

Summary Information 

Chairman’s Statement 

Investment Adviser’s Report 

Board of Directors 

Disclosure of Directorships in Public Companies 
Listed on Recognised Stock Exchanges 

Directors’ Report 

Corporate Governance 

Statement of Directors’ Responsibilities 

Directors’ Remuneration Report 

Report of the Audit Committee 

Independent Auditor’s Report 

Financial Statements:

Statement of Comprehensive Income 

Statement of Changes in Shareholders’ Equity 

Statement of Financial Position 

Statement of Cash Flows 

Notes to the Financial Statements 

Management and Administration 

1

2

4

7

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9

14

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25

26

27

28

56

•  NAV up 26.4% in 2016 on a total return basis (with dividends 
reinvested),  outperforming  the  Credit  Suisse  Leveraged 
Loan  Index  (+9.9%),  the  Credit  Suisse  High  Yield  Index 
(+18.4%) and the JP Morgan B rated CLO index (+23.7%).

•  Market capitalisation of US$302 million as at 30 December 

2016.

•  The  Company’s  shares  traded  at  an  average  premium  to 

NAV of 2.6% in 2016.

•  The Company declared 13.45 US cents per ordinary share 
in dividends in 2016, equivalent to a 13.9% dividend yield 
on  the  closing  mid-share  price  on  30  December  2016. 
Cumulative  dividend  of  27.6  US  cents  per  share  since 
inception.

•  US$9.3  million  of  principal  returned  to  shareholders  in 

2016.

•  On  29  March  2017,  Fair  Oaks  Income  Fund  Limited 

changed its name to Fair Oaks Income Limited.

•  On 3 April 2017, the First Placing and Offer raised US$68.85 

million.

•  On 5 April 2017, 263.51 million 2017 shares, 47.43 million 
2014 shares and 68.85 million C shares were admitted to 
the  Specialist  Fund  Segment  of  the  Main  Market  of  the 
London Stock Exchange.

Financial 
Highlights 

31 December 
2016 

31 December
2015

Total Net Assets 

US$311,683,895  US$277,591,973

Net Asset Value  
per ordinary share 

Net Asset Value  
per C share 

Ordinary share price  
at year end 

US$1.0024 

US$0.8663

N/A 

US$0.9191

US$0.9700 

US$0.9500

C share price at year end 

N/A 

US$0.9900

(Discount)/premium to Net  
Asset Value (ordinary shares) 

Premium to Net Asset  
Value (C shares) 

Ongoing charges ﬁgure* 

(3.23%) 

9.66%

N/A 

0.27% 

7.71%

0.49%

*Total ongoing charges at the Company level only for the year 
divided by the average NAV for the year.

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Summary Information

Principal Activity
Fair  Oaks  Income  Limited  (formerly  Fair  Oaks  Income  Fund 
Limited) (the “Company” or “FOIF”) was registered in Guernsey 
under  the  Companies  (Guernsey)  Law,  2008  on  7  March 
2014. The Company’s registration number is 58123 and it is 
regulated by the Guernsey Financial Services Commission as a 
registered closed-ended collective investment scheme under 
The  Registered  Collective  Investment  Scheme  Rules  2015. 
The  Company  is  listed  and  began  trading  on  the  Specialist 
Fund Segment (previously Specialist Fund Market) (“SFS”) of 
the London Stock Exchange on 12 June 2014.

The  Company  is  a  feeder  fund  and  during  the  year  under 
review pursued its investment objective and policy by investing 
in  FOIF  LP  (“the  Master  Fund”),  in  which  the  Company  is  a 
limited  partner.  During  prior  periods,  the  only  other  limited 
partner  was  Fair  Oaks  Founder  LP  (the  “Founding  Partner”). 
During the year ended 31 December 2016, the Master Fund 
accepted  a  new  limited  partner.  The  new  limited  partner 
was  drawn  down  during  March  2016  and  April  2016.  In 
accordance  with  the  Limited  Partnership  Agreement  dated 
and  restated  15  May  2014  (the  “LPA”),  the  share  allocated 
to  the  new  limited  partner  was  calculated  as  at  the  time  of 
drawdown of their commitments by reference to the amount 
drawn as a percentage of the adjusted Net Asset Value (“NAV”) 
of the Master Fund. The adjusted NAV is the latest available 
NAV as at the date of drawdown, adjusted for establishment 
costs.  At  31  December  2016,  the  Company  had  a  74.13% 
(31 December 2015: 100%) holding in the Master Fund. The 
general partner of the Master Fund is Fair Oaks Income Fund 
(GP)  Limited  (the  “General  Partner”  or  “GP”).  Consequently, 
the  Company’s  investment  objective  and  policy  mirror  those 
of the Master Fund.

Fair  Oaks  Founder  LP,  a  Guernsey  limited  partnership  has 
been established to act as the Founder Limited Partner of the 
Master Fund.

Investment Objective and Policy
The  investment  objective  of  the  Company  is  to  generate 
attractive,  risk-adjusted  returns,  principally  through  income 
distributions.

The  investment  policy  of  the  Company  is  to  seek  exposure 
to US and European Collateralised Loan Obligations (“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. 

If  at  any  time  the  Company  holds  any  uninvested  cash,  the 
Company may also invest on a temporary basis in the following 
Qualifying Short Term Investments:

•  cash or cash equivalents; 

•  government or public securities (as deﬁned in the Financial 

Conduct Authority (“FCA”) Rules); 

•  money market instruments; 

•  bonds; 

•  commercial paper; or 

•  other  debt  obligations  with  banks  or  other  counterparties 
having a ‘‘single A’’ (or equivalent) or higher credit rating as 
determined by any internationally recognised rating agency 
selected by the Board (which may or may not be registered 
in the EU). 

The aggregate amount deposited or invested by the Company 
with  any  single  bank  or  other  non-government  counterparty 
(including their associates) shall not exceed 20% of the NAV 
at  the  time  of  investment.  The  Company  cannot  make  any 
other types of investments without shareholder consent to a 
change of investment policy by ordinary resolution at a general 
meeting of the Company.

1

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Chairman’s Statement

Introduction
The independent Board of the Company is pleased to present 
its  Annual  Report  and  Financial  Statements  for  the  year 
ended  31  December  2016.  The  ﬁrst  half  of  2016  saw  weak 
credit  markets  and  the  outcome  of  the  Brexit  referendum 
which resulted in signiﬁcant volatility for the Company’s NAV 
and  share  price.  The  second  half  of  2016,  however,  saw  a 
signiﬁcant market recovery which resulted in full year returns 
for the Credit Suisse Leveraged Loan Index, the Credit Suisse 
High  Yield  Index  and  the  JP  Morgan  B  rated  CLO  index  of 
9.9%,  18.4%  and  23.7%  respectively.  The  Company’s  NAV 
ended the year up 26.4% on a total return basis, that is with 
dividends reinvested, outperforming all three indices.

The Company’s share price closed at a mid-price of 97.0 US 
cents on 30 December 2016. 

The Company’s shares traded at an average premium to NAV 
of 2.6% in 20161. 

Total return on Fair Oaks Income Limited vs. 
JP Morgan CLOIE B Rated Index

29.9%

21.6%

8.7%

40%

30%

20%

10%

0%

-10%

-20%

-30%

-40%

Jun
14

Dec
14

Jan
15

Jun
15

Dec
15

Jan
16

Jun
16

Dec
16

FAIR Share Price

JP Morgan CLOIE B Rated Index

FAIR NAV

1Average  premium  of  daily  share  mid-price  from  Bloomberg  over  published  NAV  as 
at each date.

2

Cash ﬂow and dividends
The Company declared and paid a 0.70 US cents per ordinary 
share  dividend  monthly  from  January  to  November  and 
announced  a  dividend  of  5.75  US  cents  per  ordinary  share 
for December, totalling 13.45 US cents per ordinary share in 
dividends  during  2016,  equivalent  to  a  13.9%  dividend  yield 
on the closing mid-share price on 30 December 2016. 

The  Master  Fund  ended  its  investment  period  in  June  2016 
and, as a result, two principal distributions were received by 
the  Company  which  were  used  to  fund  partial  redemptions 
of shares. A total of US$9.3 million of principal was returned 
to shareholders in 2016. The Master Fund received US$72.4 
million worth of cash ﬂows from its investments during 2016, 
above original expectations of US$66.2 million. 

Total dividends per share since inception

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27.0
24.0
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15.0
12.0
9.0
6.0
3.0
–

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Material events
On 22 January 2016, the Company announced the conversion 
ratio for the C Shares issued in August 2015. The net asset 
values attributable to the ordinary shares and the C shares as 
at 14 January 2016 were US$0.8578 per ordinary share and 
US$0.9102 per C share respectively. The conversion ratio was 
1.0611 ordinary shares for every one C share held at close on 
the conversion record date of 26 January 2016. Entitlements 
to  new  ordinary  shares  were  rounded  down  to  the  nearest 
whole share. 

On 16 March 2016, the Directors of the Company announced 
that Fair Oaks Income Fund (GP) Limited (the “General Partner”) 
of FOIF LP (the “Master Fund”) had applied to reinvest into the 
Company’s ordinary shares an amount equivalent to 25% of 
the advisory and management fees paid to Fair Oaks Capital 
Limited (the “Investment Adviser”) from 1 December 2015 to 
29 February 2016. As a consequence, 215,207 new ordinary 
shares were issued on 21 March 2016 at US$0.7682, being 
the NAV per ordinary share as at 29 February 2016 minus the 
February dividend to which the new ordinary shares were not 
entitled.

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Chairman’s Statement (continued)

On 4 July 2016, the Company announced that the commitment 
period of the Master Fund, in which the Company is invested, 
ended  on  12  June  2016.  The  Company  announced  that, 
inter alia, to the extent that the Company was to hold surplus 
realised  capital  following  distributions  from  the  Master  Fund, 
it intended to return such capital to shareholders on a timely 
basis and in a cost and tax efﬁcient manner.

On  25  August  2016,  shareholders  approved  changes  to  the 
rights of the ordinary shares so as to make them redeemable 
at the option of the Company.

On  14  September  2016,  the  Master  Fund  made  a  US$5.9 
million  ﬁrst  principal  payment  to  the  Company,  equivalent  to 
1.85 US cents per ordinary share. The Company distributed 
this to shareholders as a partial redemption of shares on 29 
September 2016 (Redemption Date). 

On  7  November  2016,  the  Company  announced  it  was 
considering  proposals  under  which  shareholders  would  be 
offered an option (but would not have an obligation) to extend 
the  duration  of  their  investment  in  the  Company  through  a 
share class which would retain a pro-rata interest in the Master 
Fund  and  reinvest  its  capital  distributions  into  a  new  Master 
Fund. The Company also announced that it was considering 
its options to raise further equity for the Company through a 
new  C  share  class  which,  if  issued,  would  convert  into  that 
extended duration share class once substantially invested.

On  15  November  2016,  the  Master  Fund  made  a  US$3.3 
million second principal payment to the Company, equivalent to 
1.061 US cents per ordinary share. The Company distributed 
this to shareholders as a partial redemption of shares on 30 
November 2016 (Redemption Date).

Subsequent events
Further  to  the  event  dated  7  November  2016  above  and 
following  consultations  with  shareholders,  on  10  January 
2017  the  Company  announced  its  intention  to  proceed  with 
the  proposals  under  which  shareholders  would  be  offered 
an  option  (but  would  not  have  an  obligation)  to  extend  the 
duration of their investment, and also with a further equity raise 
through a C share.

On 9 March 2017, the Company announced proposals which 
included  shareholders  being  offered  an  option  (but  not  an 
obligation)  to  extend  the  duration  of  their  investment  in  the 
Company and also a further equity raise. On 28 March 2017, 
the  Company  announced  that  47,428,202  ordinary  shares 
had  been  elected  for  re-designation  as  2014  shares  at  the 
effective  date,  representing  15.3%  of  the  ordinary  shares 
currently in issue and that 263,510,368 ordinary shares would 
be re-designated as 2017 shares, representing the balance of 
84.7% of the ordinary shares in issue.

On  29  March  2017,  the  Board  of  the  Company  announced 
that,  at  the  Extraordinary  General  Meeting  of  the  Company, 
following  proposed  resolutions  were  approved  by 
the 
shareholders:

•  that the articles of incorporation be approved and adopted

•  that on the effective date all ordinary shares of no par value 
each in the capital of the Company (“ordinary shares”) be 
re-designated  on  a  one-for-one  basis  as  “2017  ordinary 
shares” of no par value each in the capital of the Company 
(“2017  shares”)  pursuant  to  the  proposals  set  out  in  the 
Circular,  except  that  where  and  to  the  extent  that  a 
shareholder has made a valid election for the re-designation 
of  some  or  all  of  their  ordinary  shares  as  “2014  ordinary 
shares” of no par value each in the capital of the Company 
(“2014 shares”) pursuant to an election contemplated under 
the Circular and in the case of the ordinary shares held by 
an excluded shareholder (as deﬁned in the Circular), such 
ordinary shares be instead re-designated on a one-for-one 
basis as 2014 shares.

•  that the Directors of the Company be empowered to issue 
shares  in  the  Company  or  rights  to  subscribe  for  such 
shares  in  the  Company  for  cash  as  if  the  pre-emption 
provisions  contained  under  Article  6.2  did  not  apply  to 
any  such  issues  provided  that  this  power  shall  be  limited 
to the issue of the below-mentioned shares or of rights to 
subscribe for the below-mentioned shares:
–  up  to  a  maximum  number  of  200    million  C  shares  of 
no par value in the capital of the Company (“C shares”) 
under the Issue;

–  up to a maximum number of 250 million C shares under  

the Placing Programme; and

–  up  to  such  number  of  2017  shares  under  the  Placing 
Programme  as  represents  10  per  cent.  of  the  2017 
shares then in issue following the effective date, and

•  the name of the Company be changed to Fair Oaks Income 

Limited.

On 3 April 2017, the Company announced the completion of 
a  US$68.85  million  Placing  and  Offer  for  shares.  Application 
was  made  for  68,850,000  C  Shares  to  be  admitted  to  the 
Specialist  Fund  Segment  of  the  Main  Market  of  the  London 
Stock  Exchange.  Following  Admission  on  5  April  2017,  the 
Company  has  263,510,368  2017  shares,  47,428,202  2014 
shares and 68,850,000 C shares in issue.

Professor Claudio Albanese
Chairman

5 April 2017

3

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Investment Adviser’s Report

The  Investment  Adviser  believed  that  the  CLO  market 
dislocation in the ﬁrst half of 2016 was not due to fundamental 
changes  in  the  credit  markets,  but  that  it  was  the  result  of 
temporary technical factors. The Master Fund took advantage 
of the opportunity in the secondary market acquiring US$144 
million par of CLO mezzanine securities, at a weighted average 
target return to expected call date of 25.4%. 

During  the  course  of  2016,  the  strength  in  broader  capital 
markets, low loan market defaults and constructive technical 
factors supported a strong recovery in the CLO market. The 
Company  estimates  that,  as  at  the  end  of  December  2016, 
the  weighted  average  target  return  to  expected  call  date  of 
the mezzanine positions acquired in early 2016 had tightened 
to 19.8%. 

The  fundamental  performance  of  the  Master  Fund  control 
equity  positions  continued  to  be  strong  with  actual  default 
losses  in  the  underlying  CLO  portfolios  well  below  original 
base  case  assumptions.  The  Master  Fund’s  CLO  equity 
portfolio had experienced cumulative defaults of 0.1%2 as at 
30  December  2016,  signiﬁcantly  below  the  1.2%  expected 
cumulative defaults (as per the underlying investments’ base 
case  assumptions)  and  the  US  loan  market  2016  issuer-
weighted default rate of 2.1%. Exposure to energy and metals/
mining issuers in the Master Fund’s CLO equity positions was 
limited to 1.9% and 0.8% respectively. The average price for 
the  loans  in  the  Master  Fund’s  portfolio  was  99.1  US  cents 
compared  with  an  average  price  of  97.2  US  cents  for  the 
Credit Suisse Leveraged Loan Index.

The Master Fund completed the reﬁnancing of AMMC CLO 15 
on 9 December 2016. The cost of AAA-rated ﬁnancing for this 
investment  was  reduced  from  Libor+1.53%  to  Libor+1.35% 
while the cost of AA rated and A rated ﬁnancing was reduced 
from  Libor+2.45%  to  Libor+1.90%  and  from  Libor+3.46% 
to  Libor+2.80%  respectively.  The  weighted  average  cost 
of  AAA-A  ﬁnancing  decreased  by  an  estimated  28  bps  or 
US$1.14  million  per  year.  The  reduction  in  the  cost  of  CLO 
liabilities (net of reﬁnancing expenses) resulted in an increase 
in the estimated future return on this investment by over 2.0%. 
The Master Fund completed the reﬁnancing of Allegro CLO II, 
Arrowpoint 2014-3 and the reset of Harvest VII, in early 2017. 
The  Company  continues  to  monitor  closely  the  potential  for 
reﬁnancing further CLO investments in the short and medium 
term.

Portfolio Update
The  Company  as  at  30  December  20163,  via  its  investment 
in  the  Master  Fund,  had  exposure  to  904  issuers  across  41 
CLOs managed by 22 managers. Control CLO equity positions 
represented  56.2%  of  the  portfolio.  CLO  mezzanine  debt 
investments  represented  an  additional  41.7%,  composed  of 
8.5%  mezzanine  investments  in  CLOs  in  which  the  Master 
Funds  owned  a  control  equity  position,  and  33.2%  where  it 
did not. The remaining 0.8% comprised fee notes associated 
with equity investments.

Seniority (% NAV)

Subordinated Notes (control) 

56.2%

Subordinated Notes (no control) 

1.3%

Mezzanine Notes (control) 

8.5%

Mezzanine Notes (no control) 

33.2%

Other 

0.8%

Bank Loan Market Overview
The Credit Suisse Leverage Loan Index returned 9.9% during 
2016. As at 30 December 2016, the US loan market twelve 
month rolling default rate by number of issuers stood at 2.1%, 
up from 1.1% as at the end of 2015, though down slightly from 
October when it stood at 2.4%. The decline in late 2016 was 
due to several commodity-exposed issuers which defaulted in 
2015 being removed from the relevant twelve month period. 
JP  Morgan  expects  default  rates  in  the  US  loan  market  to 
remain  relatively  ﬂat  at  2%  through  20174,  with  a  shift  away 
from energy and commodity-related defaults.

The  Investment  Adviser  continues  to  believe  that  increased 
bank  loan  price  volatility  is  now  a  structural  feature  of  the 
market  due  primarily  to  technical  factors  such  as  reduced 
dealer  inventories  and  the  importance  of  retail  funds  as  the 
marginal buyer or seller in the loan market. The loan market’s 
reaction to political and other macro events can beneﬁt CLOs, 
as  their  closed-ended  nature  and  lack  of  mark-to-market 
requirements  allow  them  to  take  advantage  of  dips  in  loan 
prices.

2Cumulative default rate deﬁned as payment defaults on loans in CLOs in which the Master Fund holds an equity interest, weighted by the Master Fund’s percentage equity holding.
3Based on the underlying loans in CLOs in which the Master Fund holds equity.
4J.P Morgan “2017 High Yield Bond and Leveraged Loan Outlook”, 2 December 2016.

4

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Investment Adviser’s Report (continued)

CLO Market Overview
2016 new issue volume in the United States reached US$72.4 
billion,  down  from  US$99.1  billion  in  2015  but  ahead  of 
expectations for the year. In Europe, new issue volume reached 
£18.0 billion, up from 2015’s £13.5 billion5 as European CLO 
liabilities  tightened  towards  the  end  of  2016,  improving  the 
arbitrage for CLO equity investors.  

US  CLO  equity  arbitrage  started  to  become  attractive  again 
in  late  2016  as  the  cost  of  CLO  AAA  liabilities  tightened. 
Anecdotical evidence points at an increase in the AAA investor 
base, driven primarily by Asian institutions. US and European 
CLO  AAA  spreads  tightened  from  160  bps  and  150  bps 
respectively6 at the beginning of the year to 150 bps and 99 
bps at the end of December. As at the end of February 2017, 
US and European CLO AAA spreads have tightened further to 
133 bps and 92 bps respectively6.

Risk management
The  Master  Fund  beneﬁts 
from  an  experienced  and 
dedicated team of research analysts who continue to monitor 
the  underlying  portfolios  of  the  CLO  investments.  Close 
relationships  with  the  CLO  managers  help  to  monitor  and 
forecast  the  performance  of  the  underlying  portfolios  of  the 
CLO investments, as well as serving as ongoing due diligence 
of the CLO managers.

Geographical and Currency Breakdown
(based on par value of loans in gross portfolio)

Netherlands

1.2%

United Kingdom

1.3%

Luxembourg

2.5%

Canada

2.9%

CLO Financing - Historical Evolution

United States

88.8%

+180bps

+160bps

+140bps

+120bps

+100bps

+80bps

+60bps

+40bps

+20bps

+bps

140bps

150bps

99bps

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1

n
u
J

6
1

l

u
J

6
1

g
u
A

6
1
p
e
S

6
1

t
c
O

6
1

v
o
N

6
1

c
e
D

Primary USD
- CLO AAA Spread 
to 3M Libor

Primary EUR
- CLO AAA Spread 
to 6M Libor

Source: JP Morgan

The  second  half  of  2016  also  saw  an  upward  trend  in  CLO 
reﬁnancing activity, bringing 2016 global reﬁnancing volumes 
to US$43.6 billion (US$39.4 billion US, US$4.2 billion Europe)6. 

Risk retention regulations ofﬁcially came into effect in the United 
States on 24 December 2016. We believe that the impact in 
the  market  will  be  marginal  given  the  availability  of  solutions 
which minimise the capital required to be provided by the CLO 
manager to comply with the 5% retention requirement. 

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Rating Breakdown
(based on par value of loans in gross portfolio)

CCC
0.9%

CC
0.1%

D
0.2%

NA
2.2%

BBB
0.1%

BBB-
0.5%
BB+
2.9%

CCC-
0.2%

CCC+
1.2%

B-
8.9%

BB
5.3%

B
39.8%

BB-
15.3%

B+
22.4%

Industry Diversification (Top 10)*

Leisure Goods / Activities / Movies

Lodging & Casinos

Containers & Glass

Retailers (except food & drug)

Telecommunications

Chemical & Plastics

Financial Intermediaries

Electronics / Electrical

Health Care

Business Equipment & Services

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

Source:  CLO  trustee  reports.  Based  on  the  Master  Fund’s  equity  positions  and 
weighted by CLO size and Master Fund’s equity ownership percentage

*This forms an integral part of the ﬁnancial statements.

5JP Morgan Research.
6JP Morgan Research. Primary USD CLO AAA spreads to 3M Libor. Primary EUR CLO AA spread to 6M Euribor.

5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Investment Adviser’s Report (continued)

Outlook
The Investment Adviser believes that the Master Fund’s CLO 
investments  are  well  positioned  to  continue  to  generate 
attractive returns, given the quality of the underlying portfolios 
and the continuous active monitoring and management of the 
underlying credit risk. 

The Master Fund will also continue to beneﬁt from the optionality 
inherent in the funding of its control CLO equity investments. 
We  expect  to  reﬁnance  the  CLO  liabilities  of  additional  CLO 
positions, increasing the future cash distributions to the CLO 
equity. 

We  further  expect  the  “tactical”  mezzanine  investments  to 
continue to perform strongly as we believe that the weighted 
average  target  return  as  at  the  end  of  2016  (19.8%)  still 
represents  a  very  attractive  risk-reward  proposition  in  the 
current market environment.

Fair Oaks Capital Limited
5 April 2017

6

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Board of Directors

The Directors of the Company, all of whom are non-executive 
and independent, are listed as follows:

Professor  Claudio  Albanese  (Chairman)  (age  54)  is  the 
Head  of  Analytics  at  IMEX  Synchronised  Risk  and  Honorary 
Professor  of  Finance  at  CASS  School  of  Business,  London 
(since Autumn 2008). He received a PhD in Theoretical Physics 
from  ETH  Zurich  in  1988.  He  has  held  faculty  positions  at 
numerous academic institutions including ETH Zurich, UCLA, 
the Courant Institute at NYU, and Princeton University. In 1994 
he  joined  the  University  of  Toronto  as  Associate  Professor 
of  Mathematical  Physics  and  in  that  year  he  redirected  his 
career towards Mathematical Finance. In 1998 he spent one 
year at Morgan Stanley at the credit derivatives trading desk. 
In  2004  he  joined  Imperial  College  London  as  Professor  of 
Mathematical  Finance.  Claudio  consults  for  several  banks, 
ﬁnancial  service  organisations  and  hardware  manufacturers, 
speaks at numerous conferences and has published over 50 
articles in academic and professional journals. Claudio funded 
Global  Valuation  Limited,  a  software  ﬁrm  dedicated  to  the 
simulation of banks’ OTC portfolios and XVA metrics. Claudio 
was non-executive director at Carador Income Fund Plc from 
2006 to 2013. Claudio is a UK resident.

Jonathan  (Jon)  Bridel  (Chairman  of  the  Audit  Committee) 
(age  52)  is  currently  a  non-executive  chairman  or  director 
of  various  listed  and  unlisted  investment  funds  and  private 
equity  investment  managers.  Listings  include  the  premium 
segment of the Ofﬁcial List of the UK Listing Authority and the 
Specialist Fund Segment of the London Stock Exchange. He 
was until 2011 Managing Director of Royal Bank of Canada’s 
investment businesses in Guernsey and Jersey. This role had 
a strong focus on corporate governance, oversight, regulatory 
and  technical  matters  and  risk  management.  After  qualifying 
as  a  Chartered  Accountant  in  1987,  Jon  worked  with  Price 
Waterhouse Corporate Finance in London and subsequently 
served  in  a  number  of  senior  management  positions  in 
Australia and Guernsey in corporate and offshore banking and 
specialised in credit. He was also chief ﬁnancial ofﬁcer of two 
private multi-national businesses, one of which raised private 
equity. He holds qualiﬁcations from the Institute of Chartered 
Accountants in England and Wales where he is a Fellow, the 
Chartered  Institute  of  Marketing  and  the  Australian  Institute 
of  Company  Directors.  He  graduated  with  an  MBA  from 
Durham University in 1988. Jon is a chartered marketer and a 
member of the Chartered Institute of Marketing, the Institute of 
Directors and is a chartered fellow of the Chartered Institute for 
Securities and Investment. Jon is a Guernsey resident.

Nigel  Ward  (Chairman  of  the  Risk  Committee)  (age  60)  has 
over 40 years’ experience in international investment markets, 
credit and risk analysis, portfolio management, corporate and 
retail  banking,  corporate  governance,  compliance  and  the 
managed funds industry gained at NatWest, TSB Bank, Baring 
Asset  Management  and  Bank  Sarasin.  He  is  currently  an 
independent non-executive chairman or director on the board 
of several investment funds and companies, including London 
and CISE listings, with investment mandate experience ranging 
across private equity, distressed debt, European SME private 
debt, ground rents, agricultural land, student accommodation, 
commodities, equity income and UK activist equity. Nigel was 
a founding Commissioner of the Guernsey Police Complaints 
Commission, and is an Associate of the Institute of Financial 
Services, a member of the Institute of Directors and holder of 
the  IoD  Diploma  in  Company  Direction.  Nigel  is  a  Guernsey 
resident.

7

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Disclosure of Directorships in Public Companies 
Listed on Recognised Stock Exchanges

The following summarises the Directors’ directorships in other public companies: 

Company Name 

Claudio Albanese
None

Jon Bridel
Alcentra European Floating Rate Income Fund Limited 
DP Aircraft 1 Limited 
Funding Circle SME Income Fund 
Sequoia Economic Infrastructure Income Fund Limited 
Starwood European Real Estate Finance Limited 
The Renewables Infrastructure Group Limited 

Nigel Ward
Acorn Income Fund Limited 
Braemar Group PCC Limited 
Crystal Amber Fund Limited 
Emerging Manager PCC Limited 
Hadrian’s Wall Secured Investments Limited 

Stock Exchange

London Stock Exchange – Main Market
London Stock Exchange – SFS
London Stock Exchange – Main Market
London Stock Exchange – Main Market
London Stock Exchange – Main Market
London Stock Exchange – Main Market

London Stock Exchange – Main Market
The International Stock Exchange
London Stock Exchange – AIM
The International Stock Exchange
London Stock Exchange – Main Market

8

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Directors’ Report

The Directors of Fair Oaks Income Limited (formerly Fair Oaks Income Fund Limited) (the “Company”) are pleased to submit their 
Annual Report and the Audited Financial Statements (the “Financial Statements”) for the year ended 31 December 2016. In the 
opinion of the Directors, the Annual Report and Audited Financial Statements are fair, balanced and understandable and provide 
the information necessary for shareholders to assess the Company’s performance, business model and strategy.

The Company
The  Company  was  incorporated  and  registered  in  Guernsey  on  7  March  2014  under  the  Companies  (Guernsey)  Law,  2008. 
The Company’s registration number is 58123 and it is regulated by the Guernsey Financial Services Commission (“GFSC”) as a 
registered closed-ended collective investment scheme. The ordinary shares were listed on the SFS of the London Stock Exchange 
(“LSE”) on 12 June 2014.

Going Concern
The Company has been incorporated with an unlimited life. On or before 31 May 2019, being the planned end date of the Master 
Fund, an ordinary resolution will be proposed by the Board to shareholders that the Company continues as a registered closed-
ended  collective  investment  scheme  (“Continuation  Resolution”).  If  the  Continuation  Resolution  is  passed  by  shareholders,  a 
further Continuation Resolution will be proposed on the nearest Business Day falling every two years thereafter. If the Continuation 
Resolution is not passed, the Board shall draw up proposals for the voluntary liquidation of the Company. 

After a review of the Company’s holdings in cash and cash equivalents, investments and a consideration of the income deriving 
from those investments the Directors believe that it is appropriate to adopt the going concern basis in preparing the Financial 
Statements as the Company has adequate ﬁnancial resources to meet its liabilities as they fall due.  

Risks and uncertainties
In respect to the Company’s system of internal controls and reviewing its effectiveness, the Directors:
•  are satisﬁed that they have carried out a robust assessment of the principal risks facing the Company, including those that 

would threaten its business model, future performance, solvency or liquidity; and

•  have reviewed the effectiveness of the risk management and internal control systems including material ﬁnancial, operational 
and compliance controls (including those relating to the ﬁnancial reporting process) and no signiﬁcant failings or weaknesses 
were identiﬁed.

The Risk Committee reviews the Company’s overall risks at least four times a year and monitors the risk control activity designed 
to mitigate these risks. 

The risks associated with the Company include:
•  Operational risk - The Board is ultimately responsible for all operational facets of performance including cash management, 
asset management, regulatory and listing obligations. The Company has no employees and so enters into a series of contracts/
legal agreements with a series of service providers to ensure that both operational performance and regulatory obligations are 
met. The Board performs on-going internal monitoring of operational processes and controls and receives regular reports from 
the administrators of the Company, along with a report from the Auditors. 

•  Investment risk - The Risk Committee formally monitors the investment performance of the Company four times a year, when 
the Investment Adviser reports on the performance of the Company’s portfolio at the Board meetings. The Investment Adviser 
carries  out  extensive  due  diligence  on  the  Master  Fund’s  underlying  investments  and  monitors  performance  regularly.  The 
investment guidelines and restrictions, as detailed in the prospectus of the Company, ensures adequate diversiﬁcation of the 
Master Fund’s underlying investments is regularly monitored by the Investment Adviser.

•  Regulatory risk - The Company is required to comply with the Prospectus Rules, the Disclosure and Transparency Rules and 
the Market Abuse Directive (as implemented in the UK through Financial Services and Markets Authority). Any failure to comply 
could  lead  to  criminal  or  civil  proceedings.  The  Investment  Adviser  and  Administrator  monitor  compliance  with  regulatory 
requirements and the Administrator presents a report at quarterly Board meetings.

•  Financial risk - The ﬁnancial risks faced by the Company, including market, credit and liquidity risk, where appropriate, are set 
out in note 5. These risks and the controls in place to mitigate these risks are reviewed at each Risk Committee meeting. 

9

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Directors’ Report (continued)

Viability Statement
The Directors have conducted a robust assessment of the viability of the Company over a three year period to May 2020, taking 
account of the Company’s current position and the potential impact of the principal risks documented above. 

In making this statement, the Directors have considered the resilience of the Company, taking into account its current position, 
the  principal  risks  facing  the  Company  in  severe  but  plausible  scenarios  and  the  effectiveness  of  any  mitigating  actions.  This 
assessment has considered the potential impacts of these risks on the business model, future performance, solvency and liquidity 
over the period.

The Directors have determined that the three year period to May 2020 is an appropriate period over which to provide its viability 
statement as this is a reasonable period of which risks relating to the asset class should be considered. On 10 January 2017, 
the Company announced that it intended to implement proposals which included shareholders being offered an option (but not 
obligation) to extend the duration of their investment and also a further equity raise. The purpose of the proposal is to allow those 
shareholders who wish to extend the life of their investment in the Company beyond the planned end date of the Master Fund, to 
be able to do so by having their ordinary shares re-designated as 2017 shares, with such 2017 shares effectively investing in and 
having exposure to a new master fund (“Master Fund II”), which will have a planned end date of June 2024 and an investment 
objective and policy substantially similar to that of the Master Fund. The General Partner will act as the general partner of Master 
Fund II as well as the Master Fund. 

In making their assessment, factors taken into consideration by the Directors included the Company’s NAV, net income, capital 
repayments and resulting cash ﬂows and dividend cover over the period. These metrics were subjected to stress tests which 
involved  ﬂexing  a  number  of  main  assumptions  underlying  the  forecast  and  default  rates  modestly  higher  than  the  ﬁve  year 
average. Where appropriate, this analysis was carried out to evaluate the potential impact of the Company’s principal risks actually 
occurring, primarily, severe changes to macro economic conditions, increased defaults, deterioration in underlying credit ratings 
and downgrading or illiquidity of non-investment grade loans.

Based on this assessment, the Directors have a reasonable expectation that the Company will be able to continue in operation 
and meet its liabilities as they fall due over the period to May 2020.

Results and Dividends
The results for the year are shown in the Statement of Comprehensive Income on page 24.

The Directors declared dividends of US$24,492,044 during 2016 followed by an additional dividend declaration of US$18,055,284, 
declared  on  4  January  2017  in  relation  to  the  year  ended  31  December  2016  (31  December  2015:  Ordinary  shareholders: 
US$24,642,883, C shareholders: US$2,396,372). Further details of dividends declared or paid are detailed in note 4.

The Board paid or declared dividends to shareholders representing an amount in aggregate at least equal to the gross income from 
investments, which are received from the Master Fund in the relevant ﬁnancial period attributable to the Company’s investment in 
the Master Fund, and Qualifying Short Term Investments less expenses of the Company.

Independent Auditor
KPMG Channel Islands Limited were appointed on 12 May 2014 and served as Auditor during the ﬁnancial year. A resolution to 
re-appoint KPMG Channel Islands Limited as Auditor will be put to the forthcoming Annual General Meeting (“AGM”). 

Investment Adviser
The  Directors  are  responsible  for  the  determination  of  the  Company’s  investment  policy  and  have  overall  responsibility  for  the 
Company’s activities. The Company has, however, entered into an Investment Advisory Agreement with Fair Oaks Capital Limited 
(the “Investment Adviser”) under which the Investment Adviser has been appointed to provide investment advisory services, which 
include analysing the progress of all assets and investments of the Company and advising the Company on liquidity and working 
capital retention issues, subject to the overriding supervision of the Directors.

The  Directors  consider  that  the  interests  of  shareholders,  as  a  whole,  are  best  served  by  the  continued  appointment  of  the 
Investment Adviser to achieve the Company’s investment objectives. A summary of these terms, including the investment advisory 
fee and notice of termination period, is set out in note 8 of the Financial Statements.

10

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Directors’ Report (continued)

Custody Arrangements
The Company’s assets, excluding the investment into the Master Fund, are held in custody by BNP Paribas Securities Services 
S.C.A.,  Guernsey  Branch  (the  “Custodian”),  pursuant  to  an  agreement  dated  15  December  2015.  A  summary  of  the  terms, 
including fees and notice of termination period, is set out in note 8 of the Financial Statements. 

The Company’s assets, excluding the investment into the Master Fund, are registered in the name of the Custodian in each case 
within a separate account designation and may not be appropriated by the Custodian for its own account.

The Board conducts an annual review of the custody arrangements as part of its general internal control review. The Board also 
monitors the credit rating of the Custodian, to ensure the ﬁnancial stability of the Custodian is being maintained to acceptable 
levels. As at 31 December 2016, the credit rating of the Custodian was A1 as rated by Moody’s (31 December 2015: Aa1) and A 
by Standard & Poor’s (31 December 2015: AA+).

Directors and Directors’ Interests
The Directors, all of whom are independent and non-executive, are listed on page 7.

None of the Directors has a service contract with the Company and no such contracts are proposed. Each independent non-
executive Director is entitled to a basic fee of £37,000 each per annum. 

The Directors had the following interests in the Company at 31 December 2016 and 31 December 2015, held either directly or 
beneﬁcially:

Name

Claudio Albanese (Chairman)

Jon Bridel

Nigel Ward

31 December 2016

31 December 2015

No. of ordinary
shares

Percentage

No. of ordinary
shares

Percentage

9,697

9,697

19,393

0.01%

0.01%

0.01%

10,000

10,000

20,000

0.01%

0.01%

0.02%

Substantial Shareholdings
As at 7 March 2017, the Company had the following shareholdings in excess of 5% of the issued share capital:

Name

No. of ordinary shares

Percentage

Old Mutual Global Investors

Coller Investment Management

Seven Investment Management

Smith & Williamson Holdings

Merseyside Pension Fund

53,199,414

33,258,370

27,872,611

19,508,264

15,776,008

17.11%

10.70%

8.96%

6.27%

5.07%

Related Parties
Details of transactions with related parties are disclosed in note 8 to these Financial Statements.

Listing Requirements
Throughout the period, since being admitted to the SFS of the London Stock Exchange, the Company has complied with the 
Prospectus Rules, the Disclosure and Transparency Rules and the Market Abuse Directive (as implemented in the UK through 
Financial Services and Markets Authority).

11

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Directors’ Report (continued)

Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act (“FATCA”) became effective on 1 January 2013. The legislation is aimed at determining 
the ownership of US assets in foreign accounts and improving US tax compliance with respect to those assets. On 13 December 
2013,  the  States  of  Guernsey  entered  into  an  intergovernmental  agreement  (“IGA”)  with  US  Treasury,  in  order  to  facilitate  the 
requirements under FATCA. The Company registered with the Internal Revenue Service (“IRS”) on 21 November 2014 as a Foreign 
Financial Institution (“FFI”).

United Kingdom-Guernsey Intergovernmental Agreement
On  22  October  2013,  the  Chief  Minister  of  Guernsey  signed  an  intergovernmental  agreement  with  the  United  Kingdom  (“UK-
Guernsey IGA”) under which certain disclosure requirements may be imposed in respect of certain shareholders in the Company 
who are, or are entities that are controlled by one or more, residents of the United Kingdom. The UK-Guernsey IGA is implemented 
through Guernsey’s domestic legislation, in accordance with guidance which is came into force with effect from July 2014.

Common Reporting Standard
The  Common  Reporting  Standard  (“CRS”),  formerly  the  Standard  for  Automatic  Exchange  of  Financial  Account  Information, 
became effective on 1 January 2016. CRS is an information standard for the automatic exchange of information developed by the 
Organisation for Economic Co-operation and Development (“OECD”). CRS is a measure to counter tax evasion and it builds upon 
other information sharing legislation, such as FATCA, the UK-Guernsey IGA for the Automatic Exchange of Information and the 
European Union Savings Directive. The ﬁrst reporting under CRS for Guernsey will be made during 2017.

Alternative Investment Fund Managers Directive (“AIFMD”)
The Company is categorised as a non-EU Alternative Investment Fund (as deﬁned in the AIFMD) (“AIF”) and the Board of the 
Company is a non-EU Alternative Investment Fund Manager (“AIFM”) (as deﬁned in the AIFMD) for the purposes of the AIFMD and 
as such neither it nor the Investment Adviser will be required to seek authorisation under the AIFMD. However, following national 
transposition of the AIFMD in a given EU member state, the marketing of ordinary shares in AIFs (as deﬁned in the AIFMD) that are 
established outside the EU (such as the Company) to investors in that EU member state will be prohibited unless certain conditions 
are met. Certain of these conditions are outside the Company’s control as they are dependent on the regulators of the relevant third 
country and the relevant EU member state entering into regulatory co-operation agreements with one another.

The Directors have appointed the Risk Committee to manage the relevant disclosures to be made to investors and the necessary 
regulators. On 18 February 2015, the FCA conﬁrmed that the Company was eligible to be marketed via the FCA’s National Private 
Placement Regime and the Company complied with Article 22 and 23 of the AIFMD for the year ended 31 December 2016. In 
January 2017, the Company has been authorised to market in Sweden, Finland and Luxembourg.

There have been no material changes to the Company’s Prospectus, other principal documents and operations since the Company 
disclosed to its investors the matters it is required to disclose to them under Article 23 of AIFMD on 28 May 2015. As the Board of 
the Company is the AIFM, the details of the Company’s remuneration policy for the Directors is outlined on page 19 and accords 
with the principles established by AIFMD.

Non-Mainstream Pooled Investments
The Company’s ordinary shares are considered as “excluded securities” for the purposes of the FCA Rules regarding the deﬁnition 
and promotion of non-mainstream pooled investments (“NMPI”) because the returns to investors holding the Company’s ordinary 
shares are, and are expected to continue to be, predominantly based on the returns from ordinary shares and debentures held 
indirectly  by  the  Company.  The  Board  therefore  believes  that  independent  ﬁnancial  advisers  can  recommend  the  Company’s 
ordinary shares to retail investors, although ﬁnancial advisers should seek their own advice on this issue.

12

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Directors’ Report (continued)

Reporting Fund regime
The  Company  was  accepted  into  the  UK  Reporting  Fund  regime  with  effect  from  7  March  2014.  Under  this  regime,  which 
effectively replaced the UK Distributor Status regime, an offshore investment fund operates by reference to whether it opts into the 
reporting regime (“Reporting Funds”) or not (“Non-reporting Funds”).

A UK investor who disposes of an interest in a Reporting Fund should be subject to tax on any gains realised as capital gains 
rather than income. Such investors will also be subject to income tax on the distributions received from the offshore fund and 
their share of the excess of the offshore fund’s reported income over the distributions made (i.e. they will be subject to income tax 
on their share of the offshore fund’s income regardless of whether this is distributed or not). Shareholders should seek their own 
professional advice as to the tax consequences of the UK Reporting Fund regime.

By order of the Board

Jon Bridel
Director

5 April 2017

13

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Corporate Governance

Compliance
The  Board  has  taken  note  of  the  Code  of  Corporate  Governance  issued  by  the  Guernsey  Financial  Services  Commission 
(“Guernsey Code”). The Guernsey Code provides a governance framework for GFSC licensed entities, authorised and registered 
collective investment schemes. Companies reporting in compliance with the UK Corporate Governance Code (the “UK Code”) or 
the Association of Investment Companies Code of Corporate Governance (“AIC Code”), which was published in July 2016, are 
deemed to satisfy the provisions of the Guernsey Code. The UK Code is available on the Financial Reporting Council website, 
www.frc.org.uk.

As a Guernsey incorporated company and under the SFS Rules for companies, it is not a requirement for the Company to comply 
with  the  UK  Code.  However,  the  Directors  place  a  high  degree  of  importance  on  ensuring  that  high  standards  of  corporate 
governance are maintained and have considered the principles and recommendations of the AIC Code by reference to the AIC 
Corporate Governance Guide for investment companies (“AIC Guide”). The AIC Code, as explained in the AIC Guide, addresses 
all the principles set out in the UK Code. The Board considers that reporting against the principles and recommendations of the 
AIC Code, and by reference to the AIC Guide (which incorporates the Code), will provide better information to shareholders. The 
AIC code is available on the AIC website, www.theaic.co.uk.

For the year ended 31 December 2016, the Company complied substantially with the relevant provisions of the AIC Code and it 
is the intention of the Board that the Company will comply with those provisions throughout the year ending 31 December 2017, 
with the exception of the provisions listed below:

•  The appointment of a Senior Independent Director: Given the size and composition of the Board it is not felt necessary to 
separate the roles of Chairman and Senior Independent Director. The Board considers that all the independent Directors have 
different qualities and areas of expertise on which they may lead where issues arise and to whom concerns can be conveyed.
•  Internal audit function: The Board has reviewed the need for an internal audit function and due to the size of the Company and 
the delegation of day-to-day operations to regulated service providers, an internal audit function is not considered necessary. 
The Directors will continue to monitor the systems of internal controls in place in order to provide assurance that they operate 
as intended.

•  The  appointment  of  Executive  Directors:  Due  to  the  broad  range  of  experience  of  the  Board  and  given  the  nature  of  the 
Company’s activity and that the majority of Directors are deemed to be independent under the AIC Code, it is not considered 
necessary to appoint executive Directors.

•  Chairman of the Company is also the Chairman of the Nomination and Remuneration Committee: Due to its size and composition 
by only non-Executive Directors, the Board deemed it appropriate for Mr Albanese to also serve as Chairman of the Company’s 
Nomination and Remuneration Committee. The Nomination and Remuneration Committee takes care to recognise and manage 
conﬂicts of interest and, accordingly, no Director is involved in determining their own remuneration. The Board remains satisﬁed 
that Mr Albanese possesses the necessary skills and experience to effectively discharge the duties expected from this role. This 
is going to be reviewed at the next quarterly Board meeting.

Composition and Independence of Directors
As at 31 December 2016, the Board of Directors comprised three non-executive and independent Directors as set out below.  
The Company has no executive Directors or any employees. The biographies of the Board are disclosed on page 7.

Claudio Albanese is the Chairman of the Board, the Management Engagement Committee and of the Nomination and Remuneration 
Committee.

Jon Bridel is the Chairman of the Audit Committee.

Nigel Ward is the Chairman of the Risk Committee.

In  considering  the  independence  of  the  Chairman,  the  Board  has  taken  note  of  the  provisions  of  the  AIC  Code  relating  to 
independence and has determined that Claudio Albanese is an Independent Director.

14

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Corporate Governance (continued)

Composition and Independence of Directors (continued)
Under the terms of their appointment, all non-executive Directors are subject to re-election annually at the Annual General Meeting 
(“AGM”).  At  the  Annual  General  Meeting  of  the  Company  on  19  May  2016,  shareholders  re-elected  all  the  Directors  of  the 
Company.

Although no formal training is given to Directors by the Company, the Directors are kept up to date on various matters such as 
Corporate Governance issues through bulletins and training materials provided from time to time by the Company Secretary, the 
AIC and other professional ﬁrms.

The Board receives quarterly reports and meets at least quarterly to review the overall business of the Company and to consider 
matters speciﬁcally reserved for its disposal. At these meetings the Board monitors the investment performance of the Company. 
The Directors also review the Company’s activities every quarter to ensure that it adheres to the Company’s investment policy. 
Additional ad hoc reports are received as required and Directors have access at all times to the advice and services of the Company 
Secretary, who is responsible for ensuring that the Board procedures are followed and that applicable rules and regulations are 
complied with.

The Board monitors the level of the share price premium or discount to determine what action is desirable (if any).

The Board and relevant personnel of the Investment Adviser acknowledge and adhere to the Market Abuse Regulation which was 
implemented on 3 July 2016.

Directors’ Performance Evaluation
The Board has established an informal system for the evaluation of its own performance and that of the Company’s individual 
Directors. It considers this to be appropriate having regard to the non-executive role of the Directors and the signiﬁcant outsourcing 
of services by the Company to external providers.

The Directors undertake, on an annual basis, an assessment of the effectiveness of the Board particularly in relation to its oversight 
and  monitoring  of  the  performance  of  the  Investment  Adviser  and  other  key  service  providers.  The  evaluations  consider  the 
balance of skills, experience, independence and knowledge of the Company. The Board also evaluates the effectiveness of each 
of the Directors. 

The Chairman also has responsibility for assessing the individual Board members’ training and development requirements.

Directors’ Remuneration
With effect from 27 August 2015, it is the responsibility of the Nomination and Remuneration Committee to determine and approve 
the Directors’ remuneration, having regard to the level of fees payable to non-executive Directors in the industry generally, the role 
that individual Directors fulﬁl in respect of Board and Committee responsibilities and the time committed to the Company’s affairs. 
The Chairman’s remuneration is decided separately and is approved by the Board as a whole. 

No Director has a service contract with the Company and details of the Directors’ remuneration can be found in the Directors’ 
Remuneration Report on page 19.

Directors’ and Ofﬁcers’ Liability Insurance
The Company maintains Directors’ and Ofﬁcers’ liability insurance on behalf of the Directors in relation to the performance of their 
duties as Directors. 

15

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Corporate Governance (continued)

Relations with Shareholders
The Company reports to shareholders twice a year by way of the Interim Report and Unaudited Condensed Financial Statements 
and the Annual Report and Audited Financial Statements. In addition, NAVs are published monthly and the Investment Adviser 
publishes monthly reports to shareholders on its website www.fairoaksincome.com.

The  Board  receives  quarterly  reports  on  the  shareholder  proﬁle  of  the  Company  and  regular  contact  with  major  shareholders 
is  undertaken  by  the  Company’s  corporate  brokers  and  the  executives  of  the  Investment  Adviser.  Any  issues  raised  by  major 
shareholders are reported to the Board on a regular basis.

The Chairman and individual Directors are willing to meet major shareholders to discuss any particular items of concern regarding 
the performance of the Company. Members of the Board, including the Chairman and the Audit Committee Chairman, and the 
Investment Adviser are also available to answer any questions which may be raised by any shareholder at the Company’s Annual 
General Meeting.

Directors’ Meetings and Attendance
The  table  below  shows  the  attendance  at  Board,  Audit  and  Risk  Committee  and  Committee  meetings  during  the  year.  There 
were four formal Board meetings, four Audit Committee meetings, four Risk Committee meetings, one Management Engagement 
Committee meeting, one Nomination and Remuneration Committee meeting and ﬁve informal Board meetings held during the 
year ended 31 December 2016.

Name

Number of meetings held

Claudio Albanese (Chairman)

Jon Bridel (Audit Committee Chairman)

Nigel Ward (Risk Committee Chairman)

Board

Audit
Committee

Risk
Committee

Management
Engagement
Committee

Nomination & 
Remuneration 
Committee

9

9

9

9

4

4

4

4

4

N/A

4

4

1

1

1

1

1

1

1

1

Board Committees
Audit Committee
The Audit Committee comprises all Board members, and meets at least three times a year. Jon Bridel is Chairman of the Audit 
Committee.  As  all  Directors  are  non-executive  whilst  also  taking  into  account  the  size  and  composition  of  the  Board,  it  was 
deemed appropriate that all Board members are also members of the Audit Committee. 

The key objectives of the Audit Committee include a review of the Financial Statements to ensure they are prepared to a high 
standard and comply with all relevant legislation and guidelines, where appropriate, and to maintain an effective relationship with 
the Auditor. With respect to the Auditor, the Audit Committee’s role will include the assessment of their independence, review of the 
auditor’s engagement letter, remuneration and any non-audit services provided by the Auditor. For the principal duties and report 
of the Audit Committee please refer to the Report of the Audit Committee on page 20.

Management Engagement Committee
The Management Engagement Committee meets at least once a year. It comprises the entire Board and is chaired by Claudio 
Albanese. The Management Engagement Committee is responsible for the regular review of the terms of the Investment Advisory 
Agreement and the performance of the Administrator and the Investment Adviser and also the Company’s other service providers. 

16

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Corporate Governance (continued)

Board Committees (continued)
Risk Committee
The Risk Committee meets at least four times a year. It comprises of Nigel Ward and Jon Bridel and is chaired by Nigel Ward. The 
principal function of the Risk Committee is to identify, assess, monitor and, where possible, oversee the management of risks to 
which the Company’s investments are exposed, principally to enable the Company to achieve its target investment objective of a 
total return of 12% to 14% per annum over the planned life of the Company, with regular reporting to the Board. As the Company is 
an internally managed non-EU AIFM for the purposes of AIFMD, the Directors have appointed the Risk Committee to manage the 
additional risks faced by the Company as well as the relevant disclosures to be made to investors and the necessary regulators. 
On 18 February 2015, the FCA conﬁrmed that the Company was eligible to be marketed via the FCA’s National Private Placement 
Regime and the Company complied with Articles 22 and 23 of the AIFMD for the year ended 31 December 2016. In January 2017, 
the Company has been authorised to market in Sweden, Finland and Luxembourg.

Nomination and Remuneration Committee
The Nomination and Remuneration Committee meets at least once a year. It comprises the entire Board and is chaired by Claudio 
Albanese. The Nomination and Remuneration Committee is responsible for reviewing the structure, size and composition of the 
Board, to consider the succession planning for directors and senior executives, reviewing the leadership needs of the organisation, 
identifying candidates for appointment to the Board, agreeing a framework for Director remuneration, ensuring management of the 
Company are appropriately incentivised to enhance performance and reviewing the appropriateness of the remuneration policy 
on an on-going basis. 

Internal Control Review and Risk Management System
The Board of Directors is responsible for putting in place a system of internal controls relevant to the Company and for reviewing 
the effectiveness of those systems. The review of internal controls is an ongoing process for identifying and evaluating the risks 
faced by the Company, and which are designed to manage risks rather than eliminate the risk of failure to achieve the Company’s 
objectives.

It is the responsibility of the Board to undertake risk assessment and review of the internal controls in the context of the Company’s 
objectives that cover business strategy, operational, compliance and ﬁnancial risks facing the Company. These internal controls are 
implemented by the Company’s three main service providers: the Investment Adviser, the Administrator and the Custodian. The 
Board receives periodic updates from these main service providers at the quarterly Board meetings of the Company. The Board 
is satisﬁed that each service provider has effective controls in place to control the risks associated with the services that they are 
contracted to provide to the Company and are therefore satisﬁed with the internal controls of the Company.

The Board of Directors considers the arrangements for the provision of Investment Advisory, Administration and Custody services 
to the Company on an ongoing basis and a formal review is conducted annually. As part of this review the Board considered the 
quality of the personnel assigned to handle the Company’s affairs, the investment process and the results achieved to date. 

Anti-bribery and Corruption
The Board acknowledge that the Company’s international operations may give rise to possible claims of bribery and corruption. 
In consideration of The Bribery Act 2010, enacted in the UK, at the date of this report the Board had conducted an assessment 
of the perceived risks to the Company arising from bribery and corruption to identify aspects of business which may be improved 
to mitigate such risks. The Board has adopted a zero tolerance policy towards bribery and has reiterated its commitment to carry 
out business fairly, honestly and openly.

17

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Statement of Directors’ Responsibilities

So  far  as  the  Directors  are  aware,  there  is  no  relevant  audit 
information  of  which  the  Company’s  auditor  is  unaware, 
having taken all the steps the Directors ought to have taken 
to  make  themselves  aware  of  any  relevant  audit  information 
and to establish that the Company’s auditor is aware of that 
information.

Responsibility Statement
Each of the Directors, whose names and functions are listed 
on page 7, conﬁrms to the best of each person’s knowledge 
and belief:

•  the Financial Statements, prepared in accordance with the 
International  Financial  Reporting  Standards  as  issued  by 
the IASB, give a true and fair view of the assets, liabilities, 
ﬁnancial position and result of the Company, as required by 
DTR 4.1.12R and are in compliance with the requirements 
set out in the Companies (Guernsey) Law, 2008; and  

•  the  Annual  Report,  taken  as  a  whole,  is  fair,  balanced 
and  understandable  and  includes  a  fair  review  of  the 
development  and  performance  of  the  business  and  the 
position of the Company, together with a description of the 
principal risks and uncertainties that they face, as required 
by DTR 4.1.8R and DTR 4.1.11R.

Signed on behalf of the Board by:

Jon Bridel
Director

5 April 2017

The  Directors  are  responsible  for  preparing  the  Directors’ 
Report  and  Financial  Statements 
in  accordance  with 
International Financial Reporting Standards (“IFRS”) as issued 
by the International Accounting Standards Board (“IASB”) and 
the Companies (Guernsey) Law, 2008 which give a true and 
fair view of the state of affairs of the Company and its proﬁt or 
loss for that period. 

International  Accounting  Standard  (“IAS”)  1  requires  that 
Financial Statements present fairly for each ﬁnancial period the 
Company’s ﬁnancial position, ﬁnancial performance and cash 
ﬂows. This requires the faithful representation of the effects of 
transactions, other events and conditions in accordance with 
the  deﬁnitions  and  recognition  criteria  for  assets,  liabilities, 
income  and  expenses  set  out  in  the  IASB’s  “Framework  for 
the  preparation  and  presentation  of  ﬁnancial  statements”.  In 
virtually all circumstances a fair presentation will be achieved 
by compliance with all applicable IFRS.

In  preparing  the  Financial  Statements  the  Directors  are 
required to:

•  select  suitable  accounting  policies  and  apply 

them 

consistently;

•  make  judgements  and  estimates  that  are  reasonable  and 

prudent;

•  state whether applicable accounting standards have been 
followed, subject to any material departures disclosed and 
explained in the Financial Statements; and

•  prepare  the  Financial  Statements  on  the  going  concern 
basis,  unless  it  is  inappropriate  to  presume  that  the 
Company will continue in business.

The  Directors  are  also  responsible  for  the  keeping  of  proper 
accounting records which disclose with reasonable accuracy 
at any time the ﬁnancial position of the Company and to enable 
them to ensure that the Financial Statements comply with the 
Companies (Guernsey) Law, 2008 and the Listing Rules of the 
SFS of the London Stock Exchange. They are also responsible 
for the system of internal controls, safeguarding the assets of 
the Company and hence for taking reasonable steps for the 
prevention and detection of fraud and other irregularities.

The  Directors  conﬁrm  that  they  have  complied  with  these 
requirements in preparing the Financial Statements.

The  Directors  are  also  responsible  for  the  maintenance  and 
integrity  of  the  corporate  and  ﬁnancial  information  included 
on the Company’s website. Legislation in the United Kingdom 
and  Guernsey  governing  the  preparation  and  dissemination 
of  ﬁnancial  statements  may  differ  from  legislation  in  other 
jurisdictions.

18

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Directors’ Remuneration Report

The Company’s policy in regard to Directors’ remuneration is to ensure that the Company maintains a competitive fee structure in 
order to recruit, retain and motivate non-executive Directors of excellent quality in the overall interests of shareholders. 

No element of the Directors’ remuneration is performance related, nor does any Director have any entitlement to pensions, share 
options or any long term incentive plans from the Company. 

The Company’s Articles limit the fees payable to Directors in aggregate to US$400,000 per annum. 

The Directors have received the following remuneration during the year in the form of Directors’ fees: 

For the period from 
1 January 2016 
to 31 December 
2016
Actual
£

For the period from 
1 January 2015 
to 31 December 
2015
Actual
£

37,000
37,000
37,000

111,000

33,250
33,250
33,250

99,750

Per Annum
£

37,000
37,000
37,000

111,000

Claudio Albanese (Chairman)
Jon Bridel (Audit Committee Chairman)
Nigel Ward (Risk Committee Chairman)

Total

Each Director is entitled to a fee of £37,000 per annum. 

The remuneration policy set out above is the one applied for the years ended 31 December 2016 and 31 December 2015 and is 
not expected to change in the immediate future. 

Directors’ and Ofﬁcers’ liability insurance cover is maintained by the Company on behalf of the Directors. 

The Directors were appointed as non-executive Directors by letters issued in April and May 2014. Each Director’s appointment 
letter provides that, upon the termination of his appointment, he must resign in writing and all records remain the property of the 
Company. The Directors’ appointments can be terminated in accordance with the Articles and without compensation. The notice 
period  for  the  removal  of  Directors  is  three  months  as  speciﬁed  in  the  Director’s  appointment  letter.  The  Articles  provide  that 
the ofﬁce of director shall be terminated by, among other things: (a) written resignation; (b) unauthorised absences from Board 
meetings for six months or more; (c) unanimous written request of the other Directors; or (d) an ordinary resolution of the Company. 

Under the terms of their appointment, each Director was subject to re-election at the ﬁrst Annual General Meeting (“AGM”) and 
annually thereafter. At the Annual General Meeting of the Company on 19 May 2016, shareholders re-elected all the Directors for 
re-election. The Company may terminate the appointment of a Director immediately on serving written notice and no compensation 
is payable upon termination of ofﬁce as a director of the Company becoming effective. 

The amounts payable to Directors as at 31 December 2016 and 31 December 2015, shown in note 8 related to services as non-
executive Directors. 

No Director has a service contract with the Company, nor are any such contracts proposed. 

Signed on behalf of the Board of Directors on 5 April 2017 by:

Jon Bridel
Director

19

 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Report of the Audit Committee

The  Company  has  established  an  Audit  Committee  with  formally  delegated  duties  and  responsibilities  within  written  terms  of 
reference (which are available from the Company’s website). 

Chairman and Membership
The  Audit  Committee  is  chaired  by  Jon  Bridel,  a  Chartered  Accountant.  He  and  its  other  members,  Claudio  Albanese  and 
Nigel Ward, are all independent Directors. Only independent Directors serve on the Audit Committee and members of the Audit 
Committee have no links with the Company’s Auditor and are independent of the Investment Adviser. The membership of the 
Audit Committee and its terms of reference are kept under review. The relevant qualiﬁcations and experience of each member of 
the Audit Committee is detailed on page 7 of these Financial Statements. The Audit Committee’s intention is to meet three times 
a year in any full year and meets the Auditor during those meetings. 

Duties
The Audit Committee’s main role and responsibilities is to provide advice to the Board on whether the Annual Report and Audited 
Financial Statements, taken as a whole, are fair, balanced and understandable and alongside the Interim Report and Unaudited 
Condensed  Financial  Statements  provide  the  information  necessary  for  shareholders  to  assess  the  Company’s  performance, 
business model and strategy. The Audit Committee gives full consideration and recommendation to the Board for the approval of 
the contents of the Interim and Annual Financial Statements of the Company, which includes reviewing the Auditor’s report. 

The other principal duties include to consider the appointment of the Auditor, to discuss and agree with the Auditor the nature and 
scope of the audit, to keep under review the scope, results and effectiveness of the audit and the independence and objectivity of 
the Auditor, to review the Auditor’s letter of engagement, the Auditor’s planning report for the ﬁnancial year and management letter 
and to analyse the key procedures adopted by the Company’s service providers.

The Audit Committee is responsible for monitoring the ﬁnancial reporting process and the effectiveness of the Company’s internal 
control  and  risk  management  systems  as  they  relate  to  the  ﬁnancial  reporting  process.  The  Audit  Committee  also  focuses 
particularly  on  compliance  with  legal  requirements,  accounting  standards  and  the  relevant  Listing  Rules  and  ensuring  that  an 
effective system of internal ﬁnancial and non-ﬁnancial controls is maintained. 

The Audit Committee also reviews, considers and, if thought appropriate, recommends for the purposes of the Company’s Financial 
Statements  valuations  prepared  by  the  Investment  Adviser.  These  valuations  are  the  most  critical  element  in  the  Company’s 
Financial Statements and the Audit Committee questions them carefully.

Financial Reporting and Audit
The Audit Committee has an active involvement and oversight in the preparation of both the Interim and Annual Financial Statements 
and in doing so is responsible for the identiﬁcation and monitoring of the principal risks associated with the preparation of the 
Financial Statements. The principal risks identiﬁed in the preparation of these Financial Statements are as follows:

•  Valuation of the Master Fund – The Company’s investment in the Master Fund had a fair value of US$291,682,780 as at 31 
December 2016 and represents substantially all the net assets of the Company and as such is the biggest factor in relation to 
the accuracy of the Financial Statements. This investment is valued in accordance with the Accounting Policies set out in note 2 
to the Financial Statements. The Financial Statements of the Master Fund for the year ended 31 December 2016 were audited 
by KPMG Channel Islands Limited (“KPMG”) who issued an unqualiﬁed audit opinion dated 5 April 2017. The Audit Committee 
has reviewed the Financial Statements of the Master Fund and the Accounting Policies and determined the Company’s fair 
value of the investment in the Master Fund as at 31 December 2016 is reasonable.

The Audit Committee reviews the Company’s accounting policies applied in the preparation of its Annual Financial Statements 
together  with  the  relevant  critical  judgements,  estimates  and  assumptions  and,  upon  taking  the  appropriate  advice  from  the 
Auditor, determined that these were in compliance with IFRS, as issued by the IASB and were reasonable. The Audit Committee 
reviewed the materiality levels applied by the Auditor to both the Financial Statements as a whole and to individual items and 
was satisﬁed that these materiality levels were appropriate. The Auditor reports to the Audit Committee all material corrected and 
uncorrected differences. The Auditor explained the results of their audit and that on the basis of their audit work, there were no 
uncorrected differences proposed that were material in the context of the Financial Statements as a whole.

20

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Report of the Audit Committee (continued)

Financial Reporting and Audit (continued)
The Audit Committee also reviews the Company’s ﬁnancial reports as a whole to ensure that such reports appropriately describe 
the Company’s activities and to ensure that all statements contained in such reports are consistent with the Company’s ﬁnancial 
results  and  projections.  Accordingly,  the  Audit  Committee  was  able  to  advise  the  Board  that  the  Annual  Report  and  Audited 
Financial Statements are fair, balanced and understandable and provide the information necessary for shareholders to assess the 
Company’s performance, business model and strategy.

External Auditor
The Audit Committee has responsibility for making a recommendation on the appointment, re-appointment and removal of the 
Auditor. KPMG was appointed as the ﬁrst Auditor of the Company. During the year, the Audit Committee received and reviewed 
the audit plan and report from KPMG. It is standard practice for the Auditor to meet privately with the Audit Committee without the 
Investment Adviser being present at each Audit Committee meeting. 

To assess the effectiveness of the Auditor, the Audit Committee will review:

•  The Auditor’s fulﬁlment of the agreed audit plan and variations from it;
•  The Audit Committee Report from the Auditor highlighting the major issues that arose during the course of the audit; and
•  Feedback from the Investment Adviser and Administrator evaluating the performance of the audit team.

Where non-audit services are to be provided to the Company by the Auditor, full consideration of the ﬁnancial and other implications 
on the independence of the auditor arising from any such engagement will be considered before proceeding. All non-audit services 
are pre-approved by the Audit Committee after it is satisﬁed that relevant safeguards are in place to protect the auditors’ objectivity 
and independence. 

To fulﬁl its responsibility regarding the independence of the Auditors, the Audit Committee considered:

•  a report from the Auditor describing its arrangements to identify, report and manage any conﬂicts of interest; and
•  the extent of non-audit services provided by the Auditor.

During the year ended 31 December 2016, KPMG provided non-audit services in the form of advice to the Board on the C share 
conversion. At the Audit Committee meeting in November 2016, KPMG conﬁrmed that this had not impacted their independence 
and outlined the reasons for this. These non-audit services comply with the Financial Reporting Council (“FRC”) Revised Ethical 
Standard 2016. The Audit Committee considered this and were satisﬁed that these non-audit services had no bearing on the 
independence of the Auditor.

The following table summarises the remuneration paid to KPMG and to other KPMG International member ﬁrms for audit and non-
audit services during the year ended 31 December 2016 and 31 December 2015, translated into the presentation currency at the 
exchange rate prevailing at 31 December 2016 and 31 December 2015 respectively.

For the year ended 
31 December 2016
US$

For the year ended 
31 December 2015
US$

KPMG Channel Islands Limited
– Annual Audit
– Interim review

Other KPMG member ﬁrms
– Initial prospectus
– Reporting accountant services – issuance of C shares
– Tax compliance services

80,827
27,765

9,255
-
-

71,248
22,104

-
94,997
2,210

21

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Report of the Audit Committee (continued)

Internal Controls
As the Company’s investment objective is to invest all of its assets into the Master Fund, the Audit Committee, after consultation 
with the Investment Adviser and Auditor, considers the key risk of misstatement in its Financial Statements to be the valuation of 
its investment in the Master Fund, but are also mindful of the risk of the override of controls by its two main service providers: the 
Investment Adviser and Administrator.

The Investment Adviser and Administrator together maintain a system of internal control on which they report to the Board. The 
Board has reviewed the need for an internal audit function and has decided that the systems and procedures employed by the 
Investment Adviser and Administrator provide sufﬁcient assurance that a sound system of risk management and internal control, 
which safeguards shareholders’ investment and the Company’s assets, is maintained. An internal audit function speciﬁc to the 
Company is therefore considered unnecessary.

The Audit Committee is responsible for reviewing and monitoring the effectiveness of the internal ﬁnancial control systems and risk 
management systems on which the Company is reliant. These systems are designed to ensure proper accounting records are 
maintained, that the ﬁnancial information on which the business decisions are made and which is issued for publication is reliable, 
and that the assets of the Company are safeguarded. Such a system of internal ﬁnancial controls can only provide reasonable and 
not absolute assurance against misstatement or loss.

In accordance with the guidance published in the ‘Turnbull Report’ by the FRC, the Audit Committee has reviewed the Company’s 
internal control procedures. These internal controls are implemented by the Investment Adviser and the Administrator. The Audit 
Committee has performed reviews of the internal ﬁnancial control systems and risk management systems during the year. The 
Audit Committee is satisﬁed with the internal ﬁnancial control systems of the Company. 

On behalf of the Audit Committee

Jon Bridel
Audit Committee Chairman
5 April 2017

22

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Independent Auditor’s Report to the  
members of Fair Oaks Income Limited

Opinion on the ﬁnancial statements
In our opinion the ﬁnancial statements:
•  give a true and fair view of the state of the Company’s affairs 
as at 31 December 2016 and of its result for the year then 
ended; 

•  are  in  accordance  with  International  Financial  Reporting 

Standards as issued by the IASB; and 

•  comply with the Companies (Guernsey) Law, 2008. 

Matters on which we are required to report by exception
We have nothing to report in respect of the following matters 
where  the  Companies  (Guernsey)  Law,  2008  requires  us  to 
report to you if, in our opinion:
•  the Company has not kept proper accounting records; or 
•  the  ﬁnancial  statements  are  not  in  agreement  with  the 

accounting records; or 

•  we have not received all the information and explanations, 
which to the best of our knowledge and belief are necessary 
for the purpose of our audit.

Dermot A. Dempsey
For and on behalf of KPMG Channel Islands Limited
Chartered Accountants and Recognised Auditors, Guernsey

6 April 2017

We  have  audited  the  ﬁnancial  statements  of  Fair  Oaks 
Income Limited (formerly Fair Oaks Income Fund Limited) (the 
“Company”)  for  the  year  ended  31  December  2016  which 
comprise  the  Statement  of  Comprehensive  Income,  the 
Statement of Changes in Shareholders’ Equity, the Statement 
of  Financial  Position,  the  Statement  of  Cash  Flows  and  the 
related notes. The ﬁnancial reporting framework that has been 
applied in their preparation is applicable law and International 
Financial Reporting Standards as issued by the IASB. 

This  report  is  made  solely  to  the  Company’s  members,  as 
a  body,  in  accordance  with  section  262  of  the  Companies 
(Guernsey) Law, 2008. Our audit work has been undertaken so 
that we might state to the Company’s members those matters 
we are required to state to them in an auditor’s report and for 
no other purpose. To the fullest extent permitted by law, we 
do not accept or assume responsibility to anyone other than 
the Company and the Company’s members as a body, for our 
audit work, for this report, or for the opinions we have formed. 

Respective responsibilities of directors and auditor
As  explained  more  fully  in  the  Statement  of  Directors’ 
Responsibilities  set  out  on  page  18,  the  directors  are 
responsible  for  the  preparation  of  the  ﬁnancial  statements 
and  for  being  satisﬁed  that  they  give  a  true  and  fair  view. 
Our  responsibility  is  to  audit  and  express  an  opinion  on  the 
ﬁnancial  statements  in  accordance  with  applicable  law  and 
International  Standards  on  Auditing  (UK  and  Ireland).  Those 
standards  require  us  to  comply  with  the  Auditing  Practices 
Board’s Ethical Standards for Auditors.

Scope of the audit of the ﬁnancial statements
An  audit  involves  obtaining  evidence  about  the  amounts 
and  disclosures  in  the  ﬁnancial  statements  sufﬁcient  to  give 
reasonable  assurance  that  the  ﬁnancial  statements  are  free 
from  material  misstatement,  whether  caused  by  fraud  or 
error. This includes an assessment of: whether the accounting 
policies are appropriate to the Company’s circumstances and 
have  been  consistently  applied  and  adequately  disclosed; 
the reasonableness of signiﬁcant accounting estimates made 
by the directors; and the overall presentation of the ﬁnancial 
statements.  In  addition,  we  read  all  the  ﬁnancial  and  non-
ﬁnancial  information  in  the  Annual  Report  to  identify  material 
inconsistencies  with  the  audited  ﬁnancial  statements  and  to 
identify any information that is apparently materially incorrect 
based  on,  or  materially  inconsistent  with,  the  knowledge 
acquired  by  us  in  the  course  of  performing  the  audit.  If  we 
become  aware  of  any  apparent  material  misstatements  or 
inconsistencies we consider the implications for our report.

23

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Statement of Comprehensive Income

For the year ended 31 December 2016

Revenue

Net gains/(losses) on ﬁnancial assets at fair value  
through proﬁt or loss

Investment income

Net foreign exchange loss

Total revenue/(loss)

Expenses

Investment adviser fees

Audit and interim review fees

Administration fees

Directors’ fees and expenses

Other expenses

Total operating expenses

1 January 2016
to 31 December 2016

1 January 2015
to 31 December 2015

Note

US$

US$

6

7

8

8

8

68,504,542

16

(39,677)

68,464,881

107,054

97,158

123,094

149,216

303,544

780,066

(7,164,483)

6,427

(5,745)

(7,163,801)

406,676

95,794

153,553

152,450

283,255

1,091,728

Proﬁt/(loss) and total comprehensive
income/(loss) for the year

67,684,815

(8,255,529)

Basic and diluted earnings/(loss) per ordinary share

10

0.2178

Basic and diluted loss per C share

10

–

(0.0208)

(0.0426)

All items in the above statement are derived from continuing operations.

The accompanying notes on pages 28 to 55 form an integral part of the Financial Statements.

24

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Statement of Changes in Shareholders’ Equity

For the year ended 31 December 2016

Share
capital

US$

Retained
earnings

US$

Total 

US$

Note

At 1 January 2016

308,213,808

(30,621,835)

277,591,973

Issue of ordinary shares during the year

Total comprehensive income for the year

Dividends declared during the year

Share redemptions paid during the year

9

4

9

165,322

–

165,322

–

–

67,684,815

67,684,815

(24,492,044)

(24,492,044)

(9,266,171)

–

(9,266,171)

At 31 December 2016

299,112,959

12,570,936

311,683,895

Share
capital

US$

Retained
earnings

US$

Total 

US$

Note

At 1 January 2015

119,542,182

4,672,949

124,215,131

Issue of ordinary shares during the year

Issue of C shares during the year

Total comprehensive loss for the year

Dividends declared during the year

9

9

4

88,398,626

100,273,000

–

–

88,398,626

100,273,000

–

–

(8,255,529)

(8,255,529)

(27,039,255)

(27,039,255)

At 31 December 2015

308,213,808

(30,621,835)

277,591,973

The accompanying notes on pages 28 to 55 form an integral part of the Financial Statements.

25

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Statement of Financial Position

At 31 December 2016

Note

31 December 2016
US$

31 December 2015
US$

Assets

Cash and cash equivalents

Prepayments

Distribution receivable

Financial assets at fair value through proﬁt or loss

Total assets

Liabilities

Other payables

Dividends payable

Total liabilities

Net assets

Equity

Retained earnings

Share capital

Total equity

Net asset value per ordinary share

Net asset value per C share

Number of ordinary shares

Number of C shares

2

6

11

4

9

9

9

12,200,459

77,057

7,826,914

291,682,780

311,787,210

103,315

–

103,315

5,401,130

92,507

10,256,219

269,069,087

284,818,943

107,889

7,119,081

7,226,970

311,683,895

277,591,973

12,570,936

299,112,959

311,683,895

1.0024

–

310,938,570

–

(30,621,835)

308,213,808

277,591,973

0.8663

0.9191

212,426,903

101,800,000

The Financial Statements on pages 24 to 55 were approved and authorised for issue by the Board of Directors on 5 April 2017 
and signed on its behalf by:

Claudio Albanese 
Chairman 

Jon Bridel
Director

The accompanying notes on pages 28 to 55 form an integral part of the Financial Statements.

26

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Statement of Cash Flows

For the year ended 31 December 2016

1 January 2016
to 31 December 2016

1 January 2015
to 31 December 2015

Note

US$

US$

Cash ﬂows from operating activities

Proﬁt/(loss) for the year

Adjustments for:

Net (gains)/losses on ﬁnancial assets at fair value  
through proﬁt or loss

Decrease/(increase) in prepayments

(Decrease)/increase in other payables

Income distributions received from Master Fund

Capital distributions received from Master Fund

Purchases into Master Fund at cost during the year

Purchases of US Treasury Bills during the year

Proceeds from sale of US Treasury Bills during the year

Net cash ﬂow from/(used in) operating activities

Cash ﬂows from ﬁnancing activities

Ordinary shares issued

C shares issued

Dividends paid during the year

Share redemptions paid during the year

Net cash ﬂow from/(used in) ﬁnancing activities

6

6

6

9

9

67,684,815

(8,255,529)

(68,504,542)

(819,727)

15,450

(4,574)

45,553,904

9,266,250

(6,500,000)

–

–

7,164,483

(1,091,046)

(55,265)

51,811

18,503,664

–

(181,103,099)

(149,985,186)

149,996,969

47,511,303

(163,682,152)

165,322

–

(31,611,125)

(9,266,171)

(40,711,974)

88,398,626

100,273,000

(19,920,174)

–

168,751,452

Net increase in cash and cash equivalents

6,799,329

5,069,300

Cash and cash equivalents at beginning of year

5,401,130

331,830

Cash and cash equivalents at end of year

12,200,459

5,401,130

The accompanying notes on pages 28 to 55 form an integral part of the Financial Statements.

27

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements

For the year ended 31 December 2016

1.  GENERAL INFORMATION

The Company was incorporated and registered in Guernsey under the Companies (Guernsey) Law, 2008 on 7 March 2014. 
The  Company’s  registration  number  is  58123  and  it  is  regulated  by  the  Guernsey  Financial  Services  Commission  as  a 
registered  closed-ended  collective  investment  scheme  under  The  Registered  Collective  Investment  Scheme  Rules  2015. 
The Company is listed and began trading on the Specialist Fund Segment (previously Specialist Fund Market) (“SFS”) of the 
London Stock Exchange on 12 June 2014.

The Company makes its investments through FOIF LP (the “Master Fund”), in which the Company is a limited partner. During 
prior periods, the only other limited partner was Fair Oaks Founder LP (the “Founding Partner”). During the year ended 31 
December 2016, the Master Fund accepted a new limited partner. The new limited partner was drawn down during March 
2016 and April 2016. In accordance with the Limited Partnership Agreement dated and restated 15 May 2014 (the “LPA”) 
the share allocated to the new limited partner was calculated as at the time of drawdown of their commitments by reference 
to the amount drawn as a percentage of the adjusted Net Asset Value (“NAV”) of the Master Fund. The adjusted NAV is the 
latest available NAV as at date of drawdown, adjusted for establishment costs. At 31 December 2016, the Company had a 
74.13% (31 December 2015: 100%) holding in the Master Fund. The general partner of the Master Fund is Fair Oaks Income 
Fund GP Limited (the “General Partner or GP”). The Master Fund invests in a portfolio consisting primarily of Collateral Loan 
Obligations (“CLOs”). The Company may also invest in Qualifying Short Term Investments if at any time the Company holds 
any uninvested cash.

With effect from 15 May 2014, Fair Oaks Capital Limited (the “Investment Adviser”) was appointed as the Investment Adviser.

2.  SIGNIFICANT ACCOUNTING POLICIES

Statement of Compliance
The Financial Statements, which give a true and fair view, have been prepared in accordance with International Financial 
Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”) and interpretations issued 
by  the  International  Financial  Reporting  Interpretations  Committee  (“IFRIC”)  and  are  in  compliance  with  the  Companies 
(Guernsey) Law, 2008 and the Prospectus Rules, the Disclosure and Transparency Rules and the Market Abuse Directive (as 
implemented in the UK through the Financial Services and Markets Authority).

Basis of Preparation
The Company’s Financial Statements have been prepared on a historical cost basis, except for ﬁnancial assets measured at 
fair value through proﬁt or loss.

The preparation of Financial Statements in conformity with IFRS requires the Company to make estimates and assumptions 
that affect the reported amounts of assets and liabilities at the date of the Financial Statements and the reported amounts 
of revenues and expenses during the reporting period. Actual results could differ from those estimates. Signiﬁcant estimates 
and judgements are discussed in note 3. The principal accounting policies adopted are set out below.

The  Directors  believe  that  the  Annual  Report  and  Financial  Statements  contains  all  of  the  information  required  to  enable 
shareholders  and  potential  investors  to  make  an  informed  appraisal  of  the  investment  activities  and  proﬁt  or  loss  of  the 
Company for the period to which it relates and does not omit any matter or development of signiﬁcance.

As  explained  below,  the  Company  qualiﬁes  as  an  investment  entity  and  is  therefore  only  required  under  IFRS  to  prepare 
individual Financial Statements under IFRS.

28

 
 
 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

2.  SIGNIFICANT ACCOUNTING POLICIES continued 
New Accounting Standards effective and adopted
- 

 IFRS 10 (amended), “Consolidated Financial Statements” (amendments effective for periods commencing on or after 1 
January 2016);
 IFRS 12 (amended), “Disclosure of Interests in Other Entities” (amendments effective for periods commencing on or after 
1 January 2016);
IAS 1 (amended) “Presentation of Financial Statements” (amendments effective 1 January 2016); and
 IAS  28  (amended),  “Investments  in  Associates  and  Joint  Ventures”  (amendments  regarding  the  application  of  the 
consolidation exception, effective for periods commencing on or after 1 January 2016).

- 

- 
- 

In addition, the IASB completed its Disclosure Initiative project in January 2016 and its September 2014 Annual Improvements 
to  IFRSs  project  in  September  2014.  These  projects  have  amended  a  number  of  existing  standards  and  interpretations 
effective for accounting periods commencing on or after 1 January 2016.

The adoption of these amended standards has had no material impact on the Financial Statements of the Company.

New Accounting Standards and interpretations applicable to future reporting periods
At the date of approval of these Financial Statements, the following standards and interpretations, which may be relevant to 
the Company but have not been applied in these Financial Statements, were in issue but not yet effective:

- 

- 

- 
- 

 IFRS 7 (amended), “Financial Instruments: Disclosures” (amendments relating to additional hedge accounting disclosures 
resulting from the introduction of the hedge accounting chapter in IFRS 9, effective for periods commencing on or after 
1 January 2018, or on application of IFRS 9 if earlier);
 IFRS 9, ‘Financial Instruments’ (relating to the classiﬁcation and measurement of ﬁnancial assets and liabilities, effective 
for periods commencing on or after 1 January 2018). This standard speciﬁes how an entity should classify and measure 
ﬁnancial assets and liabilities, including some hybrid contracts. The standard improves and simpliﬁes the approach for 
classiﬁcation  and  measurement  of  ﬁnancial  assets  compared  with  the  requirements  of  IAS  39  ‘Financial  Statements: 
Recognition and Measurement’ (“IAS 39”);
 IFRS 15, “Revenue from Contracts with Customers” (effective for periods commencing on or after 1 January 2018);
 IAS 39 (amended), “Financial Instruments: Recognition and Measurement” (amendments to permit an entity to elect to 
continue to apply the hedge accounting requirements in IAS 39 for a fair value hedge of the interest rate exposure of a 
portion of a portfolio of ﬁnancial assets or ﬁnancial liabilities when IFRS 9 is applied, and to extend the fair value option to 
certain contracts that meet the ‘own use’ scope exception, effective for periods commencing on or after 1 January 2018, 
or on application of IFRS 9 if earlier).

In addition, the IASB completed its Disclosure Initiative project in January 2016 and its Annual Improvements 2014-2016 
Cycle project in December 2016. These projects have amended a number of existing standards and interpretations effective 
for accounting periods commencing on or after 1 January 2017 or 1 January 2018.

The Board expects that the adoption of these standards in a future period will not have a material impact on the Financial 
Statements of the Company as the majority of the Company’s ﬁnancial assets are designated at fair value through proﬁt or loss.

Investment income
Other  income  relates  to  interest  income.  Interest  income  is  recognised  on  a  time-proportionate  basis  using  the  effective 
interest method and includes interest income from cash and cash equivalents.

The effective interest rate is calculated using estimated cash ﬂows, considering the expected life of the ﬁnancial asset and 
future potential credit losses. The calculation includes all fees and points paid or received between parties to the contract that 
are an integral part of the effective interest rate and all other premiums or discounts.

29

 
 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

2.  SIGNIFICANT ACCOUNTING POLICIES continued 

Net Gains and losses on Financial Assets at Fair Value through Proﬁt or Loss
Net gains/(losses) on ﬁnancial assets at fair value through proﬁt or loss includes all realised and unrealised fair value changes, 
foreign exchange gains/(losses) and income and capital distributions received.

Net  realised  gains/(losses)  from  ﬁnancial  assets  at  fair  value  through  proﬁt  or  loss  are  calculated  using  the  average  cost 
method. 

Expenses
Expenses of the Company are charged through proﬁt or loss in the Statement of Comprehensive Income on an accruals 
basis.

Ordinary Shares and C Shares
The  ordinary  shares  and  C  shares  of  the  Company  are  classiﬁed  as  equity  based  on  the  substance  of  the  contractual 
arrangements and in accordance with the deﬁnition of equity instruments under IAS 32.

The proceeds from the issue of participating shares are recognised in the Statement of Changes in Shareholders’ Equity, net 
of incremental issuance costs.

Cash and Cash Equivalents
Cash  comprises  current  deposits  with  banks.  Cash  equivalents  are  short-term,  highly  liquid  investments  that  are  readily 
convertible to known amounts of cash, are subject to an insigniﬁcant risk of changes in value, and are held for the purpose 
of meeting short-term cash commitments rather than for investments or other purposes.

Financial Instruments
Classiﬁcation
The Company classiﬁes its ﬁnancial assets and ﬁnancial liabilities into categories in accordance with IAS 39. 

The category of ﬁnancial assets and ﬁnancial liabilities at fair value through proﬁt or loss comprises:

Financial assets at fair value through proﬁt or loss
Financial assets classiﬁed in this category are designated by management on initial recognition as part of a group of ﬁnancial 
assets which are managed and their performance evaluated on a fair value basis, in accordance with a documented investment 
strategy. During the prior year, the term “ﬁnancial assets designated at fair value through proﬁt or loss” included investments 
in  US  Treasury  Bills  which  were  purchased  and  sold  during  that  year.  The  Investment  Entities  exception  to  consolidation 
(“Investment  entities  exception”)  in  IFRS  10  ‘Consolidated  Financial  Statements’  (“IFRS  10”)  requires  subsidiaries  of  an 
investment  entity  to  be  accounted  for  at  fair  value  through  proﬁt  or  loss  in  accordance  with  IAS  39.  As  the  Company’s 
investment in the Master Fund is not held for trading, it is presented in the Financial Statements with the “designated at fair 
value” ﬁnancial assets, as all are managed together on a fair value basis.

Financial assets at amortised cost
Loans and receivables are non-derivative ﬁnancial assets with ﬁxed or determinable payments that are not quoted in an active 
market, and they are carried at amortised cost. The Company includes in this category cash and cash equivalents and other 
receivables. The amortised cost of a ﬁnancial asset is the amount at which the instrument is measured at initial recognition 
(its fair value) adjusted for initial direct costs, minus principal repayments, plus or minus the cumulative amortisation, using 
effective interest rate method, of any difference between the initial amount recognised and the maturity amount, minus any 
reduction for impairment.

30

 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

2.  SIGNIFICANT ACCOUNTING POLICIES continued

Financial Instruments continued
Classiﬁcation continued 
Financial liabilities at amortised cost
The Company includes in this category expenses payable.

Recognition and initial measurement
Financial assets and ﬁnancial liabilities are measured initially at fair value, being the transaction price, including transaction 
costs for items that will subsequently be measured at amortised cost, on the trade date. Transaction costs on ﬁnancial assets 
at fair value through proﬁt or loss are expensed immediately.

Subsequent measurement
After initial measurement, the Company measures ﬁnancial instruments classiﬁed at fair value through proﬁt or loss at their 
fair values. Changes in fair value are recognised in “Net gains/(losses) on ﬁnancial assets at fair value through proﬁt or loss” 
in the Statement of Comprehensive Income. 

Derecognition
A ﬁnancial asset is derecognised when the contractual rights to the cash ﬂows from the ﬁnancial asset expire or it transfers 
the ﬁnancial asset and the transfer qualiﬁes for derecognition in accordance with IAS 39. A ﬁnancial liability is derecognised 
when the obligation speciﬁed in the contract is discharged, cancelled or expires.

Investment in the Master Fund
The Board has determined that the Company has all the elements of control as prescribed by IFRS 10 in relation to the Master 
Fund as the Company is the main limited partner, is exposed and has rights to the returns of the Master Fund and has the 
ability either directly or through the Investment Adviser to affect the amount of its returns from the Master Fund.

The Investment Entities exception requires that an investment entity that has determined that it is a parent under IFRS 10 shall 
not consolidate certain of its subsidiaries; instead it is required to measure its investment in these subsidiaries at fair value 
through proﬁt or loss in accordance with IAS 39. 

The criteria which deﬁnes an investment entity are as follows:
- 

 An entity has obtained funds from one or more investors for the purpose of providing those investors with investment 
management services;
 An entity has committed to its investors that its business purpose is to invest funds solely for the returns from capital 
appreciation, investment income or both; and

- 

-  An entity measures and evaluates the performance of substantially all of its investments on a fair value basis.

The Company provides investment management services and has a number of investors who pool their funds to gain access 
to these services and investment opportunities that they might not have had access to individually. The Company, being listed 
on the SFS of the London Stock Exchange, obtains funding from a diverse group of external shareholders. 

Consideration  is  also  given  to  the  time  frame  of  an  investment.  An  investment  entity  should  not  hold  its  investments 
indeﬁnitely but should have an exit strategy for their realisation. As the Master Fund’s investments have documented maturity/
redemption dates or will be sold if other investments with better risk/reward proﬁle are identiﬁed, the Directors consider that 
this demonstrates a clear exit strategy.

The  Master  Fund  measures  and  evaluates  the  performance  of  substantially  all  of  its  investments  on  a  fair  value  basis. 
The  fair  value  method  is  used  to  represent  the  Company’s  performance  in  its  communication  to  the  market,  including 
investor presentations. In addition, the Company reports fair value information internally to Directors, who use fair value as 
a signiﬁcant measurement attribute to evaluate the performance of its investments and to make investment decisions for 
mature investments.

31

 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

2.  SIGNIFICANT ACCOUNTING POLICIES continued

Investment in the Master Fund continued
The Company has determined that the fair value of the Master Fund is the Master Fund’s Net Asset Value (“NAV”).

The Company has concluded that the Master Fund, which is fully drawn down at the year end, meets the deﬁnition of an 
unconsolidated subsidiary under IFRS 12 and has made the necessary disclosures.

Foreign Currency
Functional and presentation currency
The  Financial  Statements  of  the  Company  are  presented  in  the  currency  of  the  primary  economic  environment  in  which 
the  Company  operates  (the  “functional  currency”).  The  Directors  have  considered  the  primary  economic  currency  of  the 
Company and considered the currency in which the original ﬁnance was raised and distributions will be made, and ultimately 
what currency would be returned if the Company was wound up. The Directors have also considered the currency to which 
the  underlying  investments  are  exposed.  On  balance,  the  Directors  believe  the  US  Dollar  best  represents  the  functional 
currency of the Company during the year. Therefore, the books and records are maintained in US Dollars and for the purpose 
of the Financial Statements the results and ﬁnancial position of the Company are presented in US Dollars, which has been 
selected as the presentation currency of the Company. All foreign exchange differences relating to monetary items, including 
cash, are presented in ‘Net foreign exchange loss’ in the Statement of Comprehensive Income.

Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates 
of  the  transactions.  Foreign  exchange  gains  and  losses  resulting  from  the  settlement  of  such  transactions  and  from  the 
translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in 
the Statement of Comprehensive Income.

Non-monetary items measured at historical cost are translated using the exchange rates at the date of the transaction (not 
retranslated). Non-monetary items measured at fair value are translated using the exchange rates at the date when fair value 
was determined.

Taxation
The Company is exempt from Guernsey income tax and is charged an annual exemption fee of £1,200 (31 December 2015: 
£1,200).

Dividends
Dividends  payable  to  the  holders  of  ordinary  shares  and  C  shares  are  recorded  through  the  Statement  of  Changes  in 
Shareholders’ Equity when they are declared to shareholders. The payment of any dividend by the Company is subject to the 
satisfaction of a solvency test as required by the Companies (Guernsey) Law, 2008.

Segmental Reporting
The Board has considered the requirements of IFRS 8 – “Operating Segments”. The Company has entered into an Investment 
Advisory Agreement with the Investment Adviser under which the  Investment Adviser is responsible for the management of 
the Company’s investment portfolio, subject to the overall supervision of the Directors. Subject to its terms and conditions, 
the  Investment  Advisory  Agreement  requires  the  Investment  Adviser  to  manage  the  Company’s  investment  portfolio  in 
accordance with the Company’s investment guidelines as in effect from time to time, including the authority to purchase and 
sell securities and other investments and to carry out other actions as appropriate to give effect thereto. However, the Board 
retains full responsibility to ensure that the Investment Adviser adheres to its mandate. Moreover, the Board is fully responsible 
for the appointment and/or removal of the Investment Adviser. Accordingly, the Board is deemed to be the “Chief Operating 
Decision Maker” of the Company.

32

 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

2.  SIGNIFICANT ACCOUNTING POLICIES continued

Segmental Reporting continued
In the Board’s opinion, the Company is engaged in a single segment of business, being the investment into the Master Fund, 
a Guernsey registered Limited Partnership.

Segment information is measured on the same basis as that used in the preparation of the Company’s Financial Statements. 

The Company receives no revenues from external customers, nor holds any non-current assets, in any geographical area 
other than Guernsey.

3.  USE OF JUDGEMENTS AND ESTIMATES

The preparation of Financial Statements in accordance with IFRS requires the Board to make judgements, estimates and 
assumptions  that  affect  the  application  of  policies  and  the  reported  amounts  of  assets,  liabilities,  income  and  expenses, 
disclosure of contingent assets and liabilities at the date of the Financial Statements and income and expenses during the 
period. The estimates and associated assumptions are based on various factors that are believed to be reasonable under the 
circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities 
that are not readily apparent from other sources. Actual results may differ from these estimates. 

The  estimates  and  underlying  assumptions  are  reviewed  on  an  ongoing  basis.  Revisions  to  accounting  estimates  are 
recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision 
and future periods if the revision affects both current and future periods. 

The principal estimates and judgements made by the Board are as follows:

Judgements
Going Concern
The Board has assessed the Company’s ﬁnancial position as at 31 December 2016 and the factors that may impact its 
performance in the forthcoming year and are of the opinion that it is appropriate to prepare these Financial Statements on a 
going concern basis.

Investment Entity
In accordance with the Investment entities exception contained in IFRS 10, the Board has determined that the Company 
satisﬁes the criteria to be regarded as an investment entity and that the Company provides investment related services and 
as a result measures its investment in the Master Fund at fair value. This determination involves a degree of judgement (see 
note 2).

Estimates
Fair Value
The Company records its investment in the Master Fund at fair value. Fair value is determined as the Company’s share of 
the Master Fund’s NAV. This share is net of any notional carried interest due to the Founder Partner of the Master Fund. 
The Investment Adviser has reviewed the NAV of the Master Fund and determined that no adjustments regarding liquidity 
discounts were required. 

33

 
 
 
 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

4.  DIVIDENDS

The Company declares dividends payable to shareholders representing an amount in aggregate at least equal to the gross 
income from investments received by the Company in the relevant ﬁnancial period attributable to the Company’s investment 
in the Master Fund and Qualifying Short Term Investments, less expenses of the Company.

The Company had declared eleven monthly dividends of a minimum of 0.7 US cents per ordinary share and a larger twelfth 
interim dividend such that, in the opinion of the Directors, substantially all net income generated by the Company in 2016 will 
be distributed to shareholders.

The Company declared the following dividends to ordinary shareholders relating to the year ended 31 December 2016:

Period to
31 January 2016

Payment date
26 February 2016

29 February 2016

24 March 2016

31 March 2016

30 April 2016

31 May 2016

30 June 2016

31 July 2016

21 April 2016

19 May 2016

23 June 2016

21 July 2016

18 August 2016

31 August 2016

22 September 2016

30 September 2016

20 October 2016

31 October 2016

24 November 2016

30 November 2016

22 December 2016

Dividend declared after 31 December 2016:

Dividend 
rate per 
share 
(cents)
0.70

0.70

0.70

0.70

0.70

0.70

0.70

0.70

0.70

0.70

0.70

Net 
dividend 
payable 
(US$)
2,243,127

2,243,128

2,244,635

2,244,635

2,244,635

2,247,019

2,235,526

Record date
12 February 2016

Ex-dividend date
11 February 2016

4 March 2016

3 March 2016

8 April 2016

6 May 2016

3 June 2016

8 July 2016

7 April 2016

5 May 2016

2 June 2016

7 July 2016

5 August 2016

4 August 2016

2,236,521

9 September 2016

8 September 2016

2,194,321

7 October 2016

6 October 2016

2,193,806

4 November 2016

3 November 2016

2,164,691

9 December 2016

8 December 2016

7.70

24,492,044

31 December 2016

2 February 2017

5.75

18,055,284

13 January 2017

12 January 2017

13.45

42,547,328

34

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

4.  DIVIDENDS continued

The Company declared the following dividends to ordinary shareholders during the year ended 31 December 2015:

Period to
31 December 2014

Payment date
12 February 2015

31 January 2015

19 February 2015

28 February 2015

19 March 2015

31 March 2015

30 April 2015

31 May 2015

30 June 2015

31 July 2015

23 April 2015

21 May 2015

25 June 2015

23 July 2015

20 August 2015

31 August 2015

24 September 2015

30 September 2015

22 October 2015

31 October 2015

19 November 2015

30 November 2015

24 December 2015

Dividend 
rate per 
share 
(cents)
4.25

Net 
dividend 
payable 
(US$)
5,173,478

Record date
30 January 2015

Ex-dividend date
29 January 2015

0.70

0.70

0.70

0.70

0.70

0.70

0.70

0.70

0.70

0.70

0.70

853,289

6 February 2015

5 February 2015

1,168,288

1,168,288

1,168,288

1,483,289

1,483,289

1,483,289

6 March 2015

10 April 2015

8 May 2015

12 June 2015

10 July 2015

5 March 2015

9 April 2015

7 May 2015

11 June 2015

9 July 2015

7 August 2015

6 August 2015

1,483,289

11 September 2015

10 September 2015

1,485,129

9 October 2015

8 October 2015

1,485,129

6 November 2015

5 November 2015

1,485,129

11 December 2015

10 December 2015

7.70

19,920,174

31 December 2015

13 January 2016

2.226

4,722,709

29 December 2015

24 December 2015

9.926

24,642,883

The Company also declared the following dividend to C shareholders for the period 17 August 2015 to 31 December 2015:

Period to
31 December 2015

Payment date
13 January 2016

Dividend 
rate per 
share 
(cents)
2.354

Net 
dividend 
payable 
(US$)
2,396,372

Record date
29 December 2015

Ex-dividend date
24 December 2015

The default payment for dividends is US Dollars. However, with effect from 29 June 2016, shareholders can elect to receive 
their dividends in Sterling by registering under the Company’s Dividend Currency Election.

The rate per ordinary share to be used to pay shareholders who elected to receive their dividend in Sterling will be announced 
on the London Stock Exchange each month prior to the payment date.

Under Guernsey law, companies can pay dividends in excess of accounting proﬁt provided they satisfy the solvency test 
prescribed  by  the  Companies  (Guernsey)  Law,  2008.  The  solvency  test  considers  whether  a  company  is  able  to  pay  its 
debts when they fall due, and whether the value of a company’s assets is greater than its liabilities. The Company passed 
the solvency test for each dividend paid.

Total dividends payable as at 31 December 2016 were US$Nil (31 December 2015: US$7,119,081).

35

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

5.  FINANCIAL RISK MANAGEMENT

The  Board  of  Directors  has  overall  responsibility  for  the  establishment  and  oversight  of  the  Company’s  risk  management 
framework. The Company’s risk management policies are established to identify and analyse the risks faced by the Company, 
to  set  appropriate  risk  limits  and  controls  and  to  monitor  risks  and  adherence  to  limits.  Risk  management  policies  are 
reviewed regularly to reﬂect changes in market conditions and the Company’s activities. Below is a non-exhaustive summary 
of the risks that the Company is exposed to as a result of its use of ﬁnancial instruments:

Market Risk
Market risk is the risk of changes in market prices, such as foreign exchange rates, interest rates and equity prices, affecting 
the Company’s income and/or the value of its holdings in ﬁnancial instruments. 

The Company’s exposure to market risk comes mainly from movements in the value of its investment in the Master Fund and 
on a look-through basis to the underlying loans in each CLO. Changes in credit spreads may further affect the Company’s 
net equity or net income directly through their impact on unrealised gains or losses on investments within the Master Fund 
and on a look-through basis to the underlying loans in each CLO.

The objective of market risk management is to manage and control market risk exposures within acceptable parameters 
while optimising the return on risk. The Company’s strategy for the management of market risk mirrors the strategy of the 
Master Fund, driven by their investment objective to generate attractive, risk-adjusted returns, principally through income 
distributions by seeking 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’s market risk is managed on a daily basis by the Investment Adviser in accordance with policies and 
procedures in place.

The Company intends to mitigate market risk generally by not making investments that would cause it to have exposure 
to a single corporate issuer exceeding 5% of the Master Fund’s aggregate gross assets at the time of investment. Special 
Purpose Vehicles such as CLOs are not considered corporate issuers. The Company’s market positions are monitored on a 
quarterly basis by the Board of Directors.

Interest Rate Risk
The Company is exposed to interest rate risk through the investments held by the Master Fund and on a look-through basis 
to the underlying assets in the CLOs.

A majority of the Company’s ﬁnancial assets comprises an investment into the Master Fund, which invests in Income Notes 
and Mezzanine tranches of cash ﬂow CLOs. The Master Fund’s exposure to interest rate risk is signiﬁcantly mitigated by the 
fact that the majority of the underlying loans in each CLO bear interest at ﬂoating Libor-based rates.

Interest receivable on bank deposits or payable on bank overdraft positions will be affected by ﬂuctuations in interest rates, 
however, the underlying cash positions will not be affected.

The following table shows the portfolio proﬁle of the Master Fund at 31 December 2016 and 31 December 2015:

Investments with a ﬂoating interest rate

Financial assets at fair value through proﬁt or loss (note 6)

31 December 2016
US$

31 December 2015
US$

411,806,313

411,806,313

275,519,805

275,519,805

36

 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

5.  FINANCIAL RISK MANAGEMENT continued

Market Risk continued
Interest Rate Risk continued
The following table shows the Directors’ best estimate of the Company’s share of the sensitivity of the portfolio of the Master 
Fund to stressed changes in interest rates, with all other variables held constant. The table assumes parallel shifts in the 
respective forward yield curves. 

Possible 
reasonable 
change in rate 
-1% 
1% 

31 December 2016 
effect on net assets 
and proﬁt or loss 
US$ 
7,895,548 
3,370,449 

Possible 
reasonable 
change in rate 
-1% 
1% 

31 December 2015
effect on net assets
and proﬁt or loss
US$
7,330,466
952,930

The change in methodology is to calculate the impact of a 1% interest rate change on the annual income generated by the 
Master Fund’s CLO mezzanine and equity investments by using Intex to generate cash ﬂow projections.

Currency risk
The Company is exposed to very limited currency risk, as the majority of its assets and liabilities are denominated in US 
Dollars. 

The Company is exposed indirectly to currency risk through its investment into the Master Fund. The Master Fund’s portfolio 
is  predominantly  denominated  in  US  Dollar.  However,  the  Master  Fund  may  also  invest  in  underlying  assets  which  are 
denominated  in  currencies  other  than  the  US  Dollar  (e.g.  Euro).  Accordingly,  the  value  of  such  assets  may  be  affected, 
favourably or unfavourably, by ﬂuctuations in currency rates which, if unhedged, could have the potential to have a signiﬁcant 
effect on returns. To reduce the impact of currency ﬂuctuations and the volatility of returns which may result from currency 
exposure, the Investment Adviser may hedge the currency exposure of the assets of the Master Fund. 

The Company’s share of the Master Fund’s total net foreign currency exposure at the year end was as follows:

EUR Exposure

Financial assets at fair value through proﬁt or loss

Forward foreign exchange contracts 

Other payables

Net EUR Exposure

GBP Exposure

Cash at bank

Other receivables

Other payables

Net GBP Exposure

NET EXPOSURE

31 December 2016
US$

31 December 2015
US$

3,948,044

(3,900,790)

(29,162)

18,092

5,298,923

(5,433,294)

(40,719)

(175,090)

31 December 2016
US$

31 December 2015
US$

708

6,751

(13,095)

(5,636)

-

17,992

(21,761)

(3,769)

12,456

(178,859)

37

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

5.  FINANCIAL RISK MANAGEMENT continued

Market Risk continued
Currency risk continued

EUR/US Dollar 
GBP/US Dollar 

Possible change 
in exchange rate 

+/- 5% 
+/- 15% 

31 December 2016 
net exposure 
US$ 
18,092 
(5,636) 

31 December 2016
effect on net assets
and proﬁt or loss
US$
(+/-) 905
(+/-) (845)

The sensitivity rate of 5% is regarded as reasonable due to the recent volatility of US Dollar against Euro.
The sensitivity rate of 15% is regarded as reasonable due to the recent volatility of US Dollar against Sterling.

EUR/US Dollar 
GBP/US Dollar 

Possible change 
in exchange rate 

+/- 5% 
+/- 5% 

31 December 2015 
net exposure 
US$ 
(175,090) 
(3,769) 

31 December 2015
effect on net assets
and proﬁt or loss
US$
(+/-) (8,755)
(+/-) (188)

Other price risks
There is a risk that the fair value or future cash ﬂows, on a look-through basis to the underlying CLOs, will ﬂuctuate due to 
changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused 
by factors speciﬁc to the individual ﬁnancial instrument or its issuer, or factors affecting all similar ﬁnancial instruments traded 
in the market. The Directors do not believe that the returns on investments are correlated to any speciﬁc index or other price 
variable.

If the value of the Company’s investment in the Master Fund were to increase or decrease by 1%, the impact on the NAV of 
the Company would be +/- US$2,916,828 (31 December 2015: US$2,690,691).

Credit and Counterparty Risk
Credit risk is the risk that a counterparty to a ﬁnancial instrument will fail to discharge an obligation or commitment that it has 
entered into with the Company, the Master Fund or a vehicle in which the Master Fund invests, resulting in a ﬁnancial loss to 
the Company. Credit risk arises principally from debt securities held, and also from derivative ﬁnancial assets and cash and 
cash equivalents. For risk management reporting purposes, the Company considers and aggregates all elements of credit 
risk exposure (such as individual obligation default risk, country risk and sector risk).

The Company’s policy on credit risk mirrors that of the Master Fund, which is to minimise its exposure to counterparties with 
perceived higher risk of default by dealing only with counterparties that meet the credit standards set out in the Company’s 
prospectus, and by taking collateral. 

The table below analyses the Company’s maximum exposure to credit risk in relation to the components of the Statement 
of Financial Position.

Cash and cash equivalents

Prepayments

Distribution receivable

Financial assets at fair value through proﬁt or loss

38

31 December 2016
US$

31 December 2015
US$

12,200,459

77,057

7,826,914

291,682,780

311,787,210

5,401,130

92,507

10,256,219

269,069,087

284,818,943

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

5.  FINANCIAL RISK MANAGEMENT continued
Credit and Counterparty Risk continued
At  31  December  2016,  the  cash  and  cash  equivalents  and  other  assets  of  the  Company,  excluding  its  investment  into 
the  Master  Fund,  and  substantially  all  of  the  assets  of  the  Master  Fund  are  held  by  BNP  Paribas  Security  Services  (the 
“Custodian”). Bankruptcy or insolvency of the Custodian may cause the Company’s rights with respect to securities held by 
the Custodian to be delayed or limited. This risk is managed by monitoring the credit quality and ﬁnancial positions of the 
Custodian. The long-term rating of the Custodian as at 31 December 2016 was A1 as rated by Moody’s (31 December 2015: 
Aa1) and A by Standard & Poor’s (31 December 2015: AA+).

Credit risk is assessed from time to time by the Investment Adviser on a look-through basis to the underlying loans in each 
CLO. The Investment Adviser seeks to provide diversiﬁcation in terms of underlying assets, issuer section, geography and 
maturity proﬁle. Please refer to the graph on page 5 for the concentration of credit risk by industry for the CLO investments 
on a look-through basis as at 31 December 2016. The Company’s credit risk is monitored on a quarterly basis by the Board 
of Directors. 

The Master Fund’s exposure to credit risk relating to the underlying CLO investments based on the country of registration (not 
necessarily asset class exposure) as at 31 December 2016 and 31 December 2015 is summarised below:

United States of America

Europe

406,480,474

5,325,839

Master Fund ﬁnancial assets at fair value through proﬁt or loss (note 6)

411,806,313

270,220,882

5,298,923

275,519,805

31 December 2016
US$

31 December 2015
US$

The geographical breakdown of the underlying CLO investments is as follows:

Country

United States of America

Other

Canada

Luxembourg

United Kingdom 

Netherlands

Total

31 December 2016
%

31 December 2015
%

88.8

3.3

2.9

2.5

1.3

1.2

100.0

91.9

2.3

1.6

2.2

1.2

0.8

100.0

The table below summarises the Master Fund’s portfolio concentrations as of 31 December 2016 and 31 December 2015:

31 December 2016

31 December 2015

Maximum portfolio 
holdings of a single 
asset % of total 
portfolio
5.68%

Average portfolio 
holdings % of 
total portfolio
1.79%

8.61%

4.00%

39

 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

5.  FINANCIAL RISK MANAGEMENT continued
Credit and Counterparty Risk continued
The tables below summarises the Master Fund’s portfolio by asset class portfolio ratings as at 31 December 2016 and 31 
December 2015:

By Asset Class

Equity CLO

Mezzanine CLO

Term loan

31 December 2016
US$

31 December 2015
US$

240,178,427

171,627,886

-

215,819,398

52,283,397

7,417,010

275,519,805

Master Fund ﬁnancial assets at fair value through proﬁt or loss (note 6)

411,806,313

The breakdown of the underlying CLO investments by rating is as follows:

Rating

B

B+

BB-

B-

BB

BB+

NR

CCC+

CCC

BBB-

CCC-

D

BBB

CC

Total

31 December 2016
%

31 December 2015
%

39.8

22.4

15.3

8.9

5.3

2.9

2.2

1.2

0.9

0.5

0.2

0.2

0.1

0.1

46.0

22.0

13.0

7.0

5.0

3.0

2.0

1.0

–

1.0

–

–

–

–

100.0

100.0

Further  information  regarding  the  geographical,  currency,  rating  and  industry  diversiﬁcation  breakdown  is  provided  in  the 
tables on page 5 in the Investment Adviser’s Report.

Activities undertaken by the Company and Master Fund may give rise to settlement risk. Settlement risk is the risk of loss due 
to the failure of a counterparty to honour its obligations to deliver cash, securities or other assets as contractually agreed. 

For the majority of transactions, settlement risk is mitigated by conducting settlements through a broker to ensure that a trade 
is settled only when both parties have fulﬁlled their contractual settlement obligations. Settlement limits form part of the credit 
approval and limit monitoring processes.

40

 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

5.  FINANCIAL RISK MANAGEMENT continued 

Liquidity Risk
Liquidity  risk  is  the  risk  that  the  Company  will  encounter  difﬁculty  in  meeting  the  obligations  associated  with  its  ﬁnancial 
liabilities that are settled by delivering cash or another ﬁnancial asset.

The Company’s policy and the Investment Adviser’s approach to managing liquidity is to ensure, as  far as possible, that 
the Company will always have sufﬁcient liquidity to meet its liabilities when due, under both normal and stress conditions, 
including  estimated  redemptions  of  shares,  without  incurring  unacceptable  losses  or  risking  damage  to  the  Company’s 
reputation.

The Company’s liquidity risk is managed on a daily basis by the Investment Adviser on a look-through basis to the underlying 
loans in each CLO. The Investment Adviser monitors and considers the Company’s and the Master Fund’s cash balances, 
projected expenses and projected income from investments when making any new investment recommendations. 

Given the Company’s permanent capital structure as a closed-ended fund, it is not exposed to redemption risk. However, the 
Company’s ﬁnancial instruments include investments in collateralised debt obligations and derivative contracts (if any) traded 
over-the-counter, which are not traded in an organised public market and which may be illiquid.

The Company’s overall liquidity risk is monitored on a quarterly basis by the Board of Directors. Shareholders have no right of 
redemption and must rely, in part, on the existence of a liquid market in order to realise their investment.

All liabilities of the Company are due within one ﬁnancial year.

Operational Risk
Operational  risk  is  the  risk  of  direct  or  indirect  loss  arising  from  a  wide  variety  of  causes  associated  with  the  processes, 
technology and infrastructure supporting the Company’s activities relating to ﬁnancial instruments, either internally or on the 
part of service providers, and from external factors other than credit, market and liquidity risks such as those arising from legal 
and regulatory requirements and generally accepted standards of investment management behaviour. 

Operational risk is managed so as to balance the limiting of ﬁnancial losses and damage to its reputation with achieving its 
investment objective of generating returns to investors. 

The primary responsibility for the development and implementation of controls over operational risk rests with the Board of 
Directors. This responsibility is supported by the development of overall standards for the management of operational risk, 
which encompasses the controls and processes at the service providers and the establishment of service levels with the 
service providers.

The Directors’ assessment of the adequacy of the controls and processes in place at the service providers with respect to 
operational risk is carried out via regular discussions with the service providers and a review of the service providers’ Service 
Organisation Controls (“SOC”) 1 reports on internal controls, if available. 

Substantially all of the assets of the Company and Master Fund are held by BNP Paribas Securities Services S.C.A., Guernsey 
Branch, in its capacity as Custodian. The bankruptcy or insolvency of the Custodian may cause the Company’s rights with 
respect to the securities held by the Custodian to be limited. The Investment Adviser monitors the credit ratings and capital 
adequacy of the Custodian on a quarterly basis, and reviews the ﬁndings documented in the SOC 1 report on the internal 
controls annually.

Capital Management
The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market conﬁdence and to 
sustain future development of the Company. The Company’s capital is represented by the ordinary shares and C shares. 
Capital is managed in accordance with the investment policy, in pursuit of its investment objectives. 

41

 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

6.  FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

Cost at the start of the year

Purchases into the Master Fund at cost during the year

Purchases of US Treasury Bills at cost during the year

Proceeds from sale of US Treasury Bills during the year

Realised gain/(loss) on sale of US Treasury Bills

Capital distributions received from Master Fund

31 December 2016
US$

31 December 2015
US$

299,827,883

6,500,000

–

–

–

(9,266,250)

118,724,784

181,103,099

149,985,186

(149,996,969)

11,783

–

Cost of investment into the Master Fund at the end of the year

297,061,633

299,827,883

Net unrealised losses on investments at the end of the year

(5,378,853)

(30,758,796)

Financial assets at fair value through proﬁt or loss at the end  
of the year

291,682,780

269,069,087

Realised gain on sales during the year

Realised loss on sales during the year

Movement in net unrealised (loss)/gain during the year

Income distributions declared by Master Fund

Net gains/(losses) on ﬁnancial assets at fair value through proﬁt or loss

–

–

25,379,943

43,124,599

68,504,542

13,392

(1,609)

(35,936,149)

28,759,883

(7,164,483)

During the year ended 31 December 2016, the Master Fund accepted a new limited partner. The new limited partner was 
drawn down during March 2016 and April 2016. At 31 December 2016, the Company had a 74.13% (31 December 2015: 
100%) holding in the Master Fund. The following table reconciles the Company’s proportionate share of the Master Fund’s 
ﬁnancial assets at fair value through proﬁt or loss to the Company’s ﬁnancial assets at fair value through proﬁt or loss:

Master Fund - Financial assets at fair value through proﬁt or loss

Less: Master Fund’s net current liabilities

31 December 2016
US$

31 December 2015
US$

305,272,020

(13,589,240)

275,519,805

(6,450,718)

Company’s ﬁnancial assets at fair value through proﬁt or loss 

291,682,780

269,069,087

As at 31 December 2016 US$Nil (31 December 2015: US$Nil) carried interest was allocated to the Master Fund’s Founder 
Partner.

42

 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

6.  FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS continued

The Company’s net unrealised losses on investment at the end of year comprises the following:

Master Fund

Net unrealised (losses)/gains on investments at the beginning  
of the year

Investment income

Unrealised gains/(losses) on ﬁnancial assets at fair value  
through proﬁt or loss

Realised losses on ﬁnancial assets at fair value

Net gains on derivative ﬁnancial instruments and foreign exchange

Other income

Expenses

Income distributions declared during the year

31 December 2016
US$

31 December 2015
US$

(30,758,796)

46,378,238

30,753,925

(315,693)

134,730

–

(8,446,658)

(43,124,599)

5,177,353

24,387,904

(27,804,710)

(2,121,116)

629,681

861

(2,268,886)

(28,759,883)

Net unrealised losses on investments at the end of the year

(5,378,853)

(30,758,796)

IFRS 13 requires that a fair value hierarchy be established that prioritises the inputs to valuation techniques used to measure 
fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities 
(Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair 
value hierarchy under IFRS 13 are set as follows:  

–  Level 1: inputs that are quoted market prices (unadjusted) in active markets for identical instruments;

– 

– 

 Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as 
prices) or indirectly (derived from prices). This category includes instruments valued using: quoted market prices in active 
markets for similar instruments; quoted for identical or similar instruments in markets that are considered less than active; 
or other valuation techniques in which all signiﬁcant inputs are directly or indirectly observable from market data.

 Level 3: Inputs that are unobservable. This category includes all instruments for which the valuation technique includes 
inputs not based on observable data and the unobservable inputs have a signiﬁcant effect on the instrument’s valuation. 
This category includes instruments that are valued based on quoted prices for similar instruments but for which signiﬁcant 
unobservable adjustments or assumptions are required to reﬂect differences between the instruments.

The level in the fair value hierarchy within which the fair value measurement is categorised is determined on the basis of the 
lowest level input that is signiﬁcant to the fair value measurement. For this purpose, the signiﬁcance of an input is assessed 
against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require signiﬁcant 
adjustment based on unobservable inputs, that measurement is a Level 3 measurement. Assessing the signiﬁcance of a 
particular input to the fair value measurement requires judgement, considering factors speciﬁc to the asset or liability.  

The determination of what constitutes ‘observable’ requires signiﬁcant judgement. Observable data is considered to be that 
market data that is readily available, regularly distributed or updated, reliable, not proprietary, and provided by independent 
sources that are actively involved in the relevant market.

43

 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

6.  FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS continued

The following table analyses within the fair value hierarchy the Company’s ﬁnancial assets (by class, excluding cash and cash 
equivalents, prepayments, distribution receivable, dividends payable and other payables) measured at fair value:

Assets:
Financial assets at fair value through proﬁt or loss 

Total 

Assets:
Financial assets at fair value through proﬁt or loss 

Total 

Level 1 
US$ 

– 

– 

Level 1 
US$ 

– 

– 

31 December 2016

Level 2 
US$ 

Level 3 
US$ 

Total
US$

– 

– 

291,682,780 

291,682,780

291,682,780 

291,682,780

31 December 2015

Level 2 
US$ 

Level 3 
US$ 

Total
US$

– 

– 

269,069,087 

269,069,087

269,069,087 

269,069,087

The investment in the Master Fund, which is fair valued at each reporting date, has been classiﬁed within Level 3 as it is not 
traded and contains unobservable inputs.

The following table presents the movement in Level 3 instruments:

Opening Balance

Purchases

Movement in net unrealised gain/(loss) during the year

Capital distributions received from Master Fund

Closing Balance

31 December 2016
US$

31 December 2015
US$

269,069,087

6,500,000

25,379,943

(9,266,250)

291,682,780

123,902,137

181,103,099

(35,936,149)
-

269,069,087

Transfers between Level 1, 2 and 3
There have been no transfers between levels during the year ended 31 December 2016 or 31 December 2015. Transfers 
between levels of the fair value hierarchy are recognised as at the end of the reporting period during which the change has 
occurred.

On a look-through basis, the following table analyses within the fair value hierarchy the Company’s proportionate share of 
the  Master  Fund’s  ﬁnancial  assets  and  derivatives  (by  class,  excluding  cash  and  cash  equivalents,  other  receivables  and 
prepayments, distribution payable, carried interest payable and trade and other payables) measured at fair value:

Level 1 
US$ 

– 
– 

– 

31 December 2016

Level 2 
US$ 

Level 3 
US$ 

Total
US$

127,227,752 
196,375 

178,044,268 
- 

305,272,020
196,375)

127,424,127 

178,044,268 

305,468,395

Financial assets at fair value through proﬁt or loss 
Derivatives at fair value through proﬁt or loss 

Total 

44

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

6.  FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS continued

Financial assets at fair value through proﬁt or loss 
Derivatives at fair value through proﬁt or loss 

Total 

Level 1 
US$ 

– 
– 

– 

31 December 2015

Level 2 
US$ 

Level 3 
US$ 

Total
US$

59,700,407 
(51,294) 

215,819,398 
- 

275,519,805
(51,294)

59,649,113 

215,819,398 

275,468,511

The following table analyses within the fair value hierarchy the Company’s assets and liabilities not measured at fair value but 
for which fair value is disclosed:

Assets:
Cash and cash equivalents 
Prepayments 
Distribution receivable 

Total 

Liabilities
Other payables 

Total 

Assets:
Cash and cash equivalents 
Prepayments 
Distribution receivable 

Total 

Liabilities
Other payables 
Dividends payable 

Total 

31 December 2016

Level 1 
US$ 

Level 2 
US$ 

Level 3 
US$ 

Total
US$

– 
– 
– 

– 

– 

– 

12,200,459 
77,057 
7,826,914 

20,104,430 

103,315 

103,315 

– 
– 
– 

– 

– 

– 

Level 1 
US$ 

31 December 2015

Level 2 
US$ 

Level 3 
US$ 

– 
– 
– 

– 

– 
– 

– 

5,401,130 
92,507 
10,256,219 

15,749,856 

107,889 
7,119,081 

7,226,970 

– 
– 
– 

– 

– 
– 

– 

12,200,459
77,057
7,826,914

20,104,430

103,315

103,315

Total
US$

5,401,130
92,507
10,256,219

15,749,856

107,889
7,119,081

7,226,970

45

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

6.  FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS continued

The assets and liabilities included in the above table are carried at amortised cost; their carrying values are a reasonable 
approximation of fair value. 

Cash and cash equivalents include deposits held with banks. 

Other  payables  represent  the  contractual  amounts  and  obligations  due  by  the  Company  for  settlement  of  trades  and 
expenses. 

The following table summarises the valuation methodologies used for the Company’s investments categorised in Level 3 as 
at 31 December 2016:

Security 

Master Fund 

Valuation 
methodology 

Unobservable
inputs 

Ranges

Fair Value 
US$

291,682,780 

NAV 

Zero % discount 

N/A

The following table summarises the valuation methodologies used for the Company’s investments categorised in Level 3 as 
at 31 December 2015:

Security 

Master Fund 

Valuation 
methodology 

Unobservable
inputs 

Ranges

Fair Value 
US$

269,069,087 

NAV 

Zero % discount 

N/A

The  Master  Fund  has  engaged  an  independent  third  party  to  provide  valuations  for  its  CLO  investments.  The  following 
table summarises, in the Company’s opinion, the valuation methodologies used by the independent third party to value the 
Company’s proportionate share of the Master Fund’s investments categorised in Level 3 as at 31 December 2016:

Unobservable 
inputs 

Ranges 

Average 

Sensitivity to changes
in signiﬁcant
unobservable inputs

Asset Class 

Income Note CLOs 

Fair Value 
US$

United States 
of America 

172,993,836 

Prices provided 
by a third party 
agent 

US$0.5800 
– 
US$0.9000 

US$0.7896 

Europe 

3,948,045 

Prices provided 
by a third party 
agent 

£0.8300 

£0.8300 

Sub Fee Notes 

United States 
of America 

1,102,387 

178,044,268

Prices provided 
by a third party 
agent 

US$0.0260 
– 
US$0.0480 

US$0.0373 

46

1% increase/decrease
will have a fair value
impact of
+/- US$1,729,938 

1% increase/decrease
will have a fair value
impact of
+/- US$39,480 

1% increase/decrease
will have a fair value
impact of
+/- US$11,024 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

6.  FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS continued 

The following table summarises, in the Company’s opinion, the valuation methodologies used by the independent third party 
to value the Master Fund’s investments categorised in Level 3 as at 31 December 2015:

Unobservable 
inputs 

Ranges 

Average 

Sensitivity to changes
in signiﬁcant
unobservable inputs

Asset Class 

Income Note CLOs 

Fair Value 
US$

United States 
of America 

208,663,900 

Prices provided 
by a third party 
agent 

US$0.5500 
– 
US$0.8500 

US$0.7372 

Europe 

5,298,923 

Prices provided 
by a third party 
agent 

£0.8000 

£0.8000 

Sub Fee Notes 

United States 
of America 

1,856,575 

215,819,398

7. 

INVESTMENT INCOME

Prices provided 
by a third party 
agent 

US$0.0345 
– 
US$0.0580 

US$0.0466 

1% increase/decrease
will have a fair value
impact of
+/- US$2,086,639  

1% increase/decrease
will have a fair value
impact of
+/- US$52,989 

1% increase/decrease
will have a fair value
impact of
+/- US$18,566 

Interest income on ﬁnancial assets carried at amortised cost:

Cash and cash equivalents

Investment income on ﬁnancial assets at fair value through proﬁt or loss

For the year ended 
31 December 2016
US$

For the year ended 
31 December 2015
US$

16

–

16

2,315

4,112

6,427

47

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

8.  RELATED PARTIES AND OTHER KEY CONTACTS

Transactions with Investment Adviser and Investment Portfolio Investor
Investment Adviser
Fair Oaks Capital Limited (the “Investment Adviser”) is entitled to receive an investment advisory fee from the Company of 
1% per annum of the NAV of the Company, in accordance with the Investment Advisory Agreement dated 15 May 2014. 
The investment advisory fee is calculated and payable on the last business day of each month or on the date of termination 
of  the  agreement.  The  base  management  fee  will  be  reduced  to  take  into  account  any  fees  received  by  the  Investment 
Adviser incurred by the Company in respect of its investment in the Master Fund (taking into account any rebates of such 
Management Fees to the Company) in respect of the same relevant period. 

The net investment advisory fee during the year is as follows:

Company investment advisory fee

Less: Master fund rebate

Net investment advisory fee

For the year ended 
31 December 2016
US$

For the year ended 
31 December 2015
US$

2,833,535
(2,726,481)

107,054

2,205,252
(1,798,576)

406,676

The Investment Adviser has agreed to reinvest and/or procure the reinvestment by the General Partner or by an Afﬁliate of it of 
(a) 25% of the fees which it receives annually from the Company pursuant to the Investment Advisory Agreement and (b) 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 by, in each case, subscribing for or procuring the subscription for ordinary shares issued by the 
Company at the then-prevailing NAV per ordinary share, provided that it shall instead use its best endeavours to purchase 
or procure the purchase of such ordinary shares in the secondary market in circumstances whereto, at the time of any such 
subscription or purchase, the ordinary shares are trading at a discount of 5% or more of the NAV per ordinary share of the 
period to which it relates. If, having used best endeavours as mentioned above, ordinary shares cannot be purchased on the 
secondary market, ordinary shares shall be subscribed for from the Company. The obligation to subscribe for or purchase or 
procure the subscription for or purchase of these ordinary shares shall be fulﬁlled by the Investment Adviser by no later than 
one month after the end of the relevant ﬁnancial period of the Company.

On 2 February 2015, the General Partner of the Master Fund reinvested US$165,701 into the Company’s ordinary shares 
which is equivalent to 25% of the investment advisory and management fees paid to the Investment Adviser and the General 
Partner during the period ended 31 December 2014.

On 4 September 2015, the General Partner of the Master Fund reinvested US$254,440 into the Company’s ordinary shares 
which is equivalent to 25% of the investment advisory and management fees paid to the Investment Adviser and the General 
Partner during the period 1 January 2015 to 31 July 2015.

On 31 December 2015, the General Partner of the Master Fund reinvested US$237,930 into the Company’s ordinary shares 
which is equivalent to 25% of the investment advisory and management fees paid to the Investment Adviser and the General 
Partner during the period 1 August 2015 to 30 November 2015.

On 21 March 2016, the General Partner of the Master Fund reinvested US$165,322 into the Company’s ordinary shares 
which is equivalent to 25% of the investment advisory and management fees paid to the Investment Adviser and the General 
Partner during the period 1 December 2015 to 29 February 2016.

48

 
 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

8.  RELATED PARTIES AND OTHER KEY CONTACTS continued

Transactions with Investment Adviser and Investment Portfolio Investor continued
Investment Adviser continued
As the Commitment Period ended on 12 June 2016, any proceeds raised by the Company from the purchase of new ordinary 
shares by the Investment Adviser will currently have to be kept in cash or be redistributed to shareholders. On 25 August 2016, 
an  amended  and  restated  Investment  Advisory  Agreement  was  agreed  between  the  Company  and  the  Investment  Adviser 
which amended the arrangement for which management fees are reinvested by the Investment Adviser. The changes to those 
arrangements were applied retrospectively from 29 February 2016.

To avoid the potential dilutive effects of these purchases, the Directors have amended the terms of the Investment Advisory 
Agreement regarding the reinvestment of fees as follows:

• 

• 

• 

 The Investment Adviser will instead agree, in circumstances where the ordinary shares trade at any discount to the then-
prevailing NAV per ordinary share, to reinvest its fees for a calendar quarter at the end of such quarter.

 More speciﬁcally, the amended Investment Advisory Agreement will provide that in circumstances where, as at the date 
of publication of the NAV per ordinary share with respect to the last calendar month of a calendar quarter (the “Quarter 
End  NAV”),  the  price  of  the  ordinary  shares  in  the  Company,  adjusted  for  any  dividends  declared,  traded  at  close  in 
the secondary market below the then-prevailing Quarter End NAV, to reinvest and/or procure the reinvestment by an 
associate of it of (a) 25% of the fees which it shall receive with respect to that quarter from the Company pursuant to 
the Investment Advisory Agreement and (b) 25% of the Management Fee which the General Partner shall receive with 
respect to that quarter from the Master Fund in relation only to the Company’s interest in the Master Fund by, in each 
case, using its best endeavours to purchase or procure the purchase of ordinary shares in the Company in the secondary 
market.

 The amended obligation to purchase or procure the purchase of such ordinary shares shall be fulﬁlled by the Investment 
Adviser by no later than one month after the end of such calendar quarter. The Investment Adviser will have no obligation 
to reinvest and/or procure the reinvestment of fees it receives with respect to a calendar quarter in circumstances where 
either (i) the ordinary shares in the Company did not trade at close in the secondary market at a discount to the then-
prevailing Quarter End NAV; or (ii) where the ordinary shares in the Company did trade at close in the secondary market 
at a discount to the then-prevailing Quarter End NAV and it is unable to purchase or procure the purchase of ordinary 
shares in the Company in the secondary market at a discount to the then prevailing Quarter End NAV despite having used 
its reasonable endeavours to do so and, in either case, the Investment Adviser shall retain all fees it receives for such 
quarter.

The Investment Advisory Agreement can be terminated by either party giving not less than 6 months written notice.

Founder Partner
The Master Fund also pays the Founder Partner a carried interest equal to 15 per cent of cash available to be distributed (after 
payment of expenses and management fees) after Limited Partners have received a Preferred Return. 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.  
As at 31 December 2016, US$10,016,796 (31 December 2015: US$Nil) carried interest was accrued at the Master Fund 
level.

49

 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

8.  RELATED PARTIES AND OTHER KEY CONTACTS continued

Other Material Contracts
Administrator
Praxis  Fund  Services  Limited  (the  “Administrator”)  shall  be  entitled  to  receive  a  time  based  fee  quarterly  in  arrears  for  all 
Company Secretarial services. The Administrator is also entitled to an annual fee of US$25,000, payable quarterly in arrears 
for Administration and Accounting services. This was increased to US$31,000 per annum during the launch of the C shares 
and was reduced back to US$25,000 when the C shares were converted to ordinary shares. 

Custodian
BNP Paribas Securities Services S.C.A., Guernsey Branch (the “Custodian”) and The Royal Bank of Canada (Channel Islands) 
Limited (the “former Custodian”) waived all fees on the basis that all assets are invested into the Master Fund.

Directors’ Fees
The Company’s Directors are entitled to a fee in remuneration for their services as Directors at a rate of £37,000 each per 
annum.

The overall charge for the above-mentioned fees for the Company and the amounts due are as follows:

CHARGE FOR THE YEAR

Investment adviser fee

Administration fee

Directors’ fees and expenses

OUTSTANDING FEES

Investment adviser fee

Administration fee

Directors’ fee

For the year ended 
31 December 2016
US$

For the year ended 
31 December 2015
US$

107,054

123,094

149,216

8,363

10,800

–

406,676

153,553

152,450

7,039

9,777

–

Shares held by related parties 
The shareholdings of the Directors’ in the Company were as follows:

Name

Claudio Albanese (Chairman)

Jon Bridel

Nigel Ward

31 December 2016

31 December 2015

No. of ordinary
shares

Percentage

No. of ordinary
shares

Percentage

9,697

9,697

19,393

0.01%

0.01%

0.01%

10,000

10,000

20,000

0.01%

0.01%

0.02%

As at 31 December 2016, the Investment Adviser, the General Partner and principals of the Investment Adviser and General 
Partner  held  an  aggregate  of  1,370,344  shares  (31  December  2015:  1,197,987),  which  is  0.44%  (31  December  2015: 
0.56%) of the issued ordinary share capital. 

50

 
 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

9.  SHARE CAPITAL

The Company’s ordinary shares are classiﬁed as equity. Incremental costs directly attributable to the issue of ordinary shares 
are recognised as a deduction in equity and are charged to the share capital account, including the initial set up costs. 

The authorised share capital of the Company is represented by an unlimited number of ordinary shares of nil par value and 
have the following rights: 

(a)   Dividends: Shareholders are entitled to receive, and participate in, any dividends or other distributions resolved to be 
distributed in respect of any accounting period or other period, provided that no calls or other sums due by them to the 
Company are outstanding. 

(b)   Winding Up: On a winding up, the shareholders shall be entitled to the surplus assets remaining after payment of all the 

creditors of the Company.

(c)   Voting: Subject to any rights or restrictions attached to any shares, at a general meeting of the Company, on a show 
of hands, every holder of voting shares present in person or by proxy and entitled to vote shall have one vote, and on 
a poll every holder of voting shares present in person or by proxy shall have one vote for each share held by him, but 
this entitlement shall be subject to the conditions with respect to any special voting powers or restrictions for the time 
being attached to any shares which may be subject to special  conditions. Refer to the Memorandum and Articles of 
Incorporation for further details.

(d)   Buyback: The Company may acquire its own shares (including any redeemable shares). Any shares so acquired by the 
Company may be cancelled or held as treasury shares provided that the number of shares of any class held as treasury 
shares must not at any time exceed any limitation set out in Guernsey company law. Any shares acquired in excess of 
this limit shall be treated as cancelled.

The C share capital of the Company is represented by a maximum of 200 million C shares of nil par value and have the 
following rights: 

(a)   Dividends: Holders of C shares shall be entitled to receive, and participate in, any dividends declared only insofar as 
such dividend is attributed, at the sole discretion of the Directors, to the C share surplus of that class. The holders of 
ordinary shares, which shall arise after conversion of any C shares in issue, shall rank in full for all dividends and other 
distributions declared, made or paid after conversion and otherwise pari passu with the ordinary shares in issue at the 
time of conversion. 

(b)   Winding Up: On a winding up or return of capital prior to conversion, the capital and assets of the Company shall be 

applied as follows:

 (i)  the ordinary share surplus shall be divided amongst the holders of ordinary shares according to the rights attaching 

thereto as if the ordinary share surplus comprised the assets of the Company available for distribution; and

 (ii)  the C share surplus attributable to each class of C shares shall be divided amongst the holders of such class pro rata 

according to their holdings of C shares of that class.

51

 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

9.  SHARE CAPITAL continued

(c)   Voting:  The  C  shares  shall  carry  the  right  to  receive  notice  of,  and  to  attend  or  vote  at,  any  general  meeting  of  the 
Company in the same manner as the ordinary shares (notwithstanding any difference in the respective NAV of the C 
shares and ordinary shares).

With effect from 25 August 2016, ordinary shares may be redeemed subject to the provisions of the Law and upon and 
subject to the following terms and conditions.

The Company shall have the right, at any time after the date of issue to redeem such number of ordinary shares as it shall, in 
its sole discretion, determine at the NAV of such shares applying at the valuation date and, in the case of partial redemption, 
proportionately in respect of each holding of ordinary shares.

The Company shall send to each shareholder a notice not less than 10 business days in advance of the relevant redemption 
date which will include details of the redemption, including:

- 
- 
- 
- 

the redemption date;
the total amount to be distributed;
a statement that the redemption will be made at the net asset value of such shares;
 any additional information that the Directors deem necessary in connection with the proposed redemption including any 
necessary arrangements in respect of certiﬁcated shares.

Upon the redemption of an ordinary share being effected pursuant to the Articles the former holder thereof shall cease to be 
entitled to any rights in respect thereof (excepting always the right to receive a dividend which has become due and payable 
in respect thereof prior to such redemption being effected and to receive the proceeds of such redemption) and accordingly 
his name shall be removed from the Register with respect thereto.

Any ordinary share so redeemed will be treated as cancelled on redemption and the amount of the Company’s share capital 
will be reduced accordingly.

Issued Share Capital
Ordinary Shares

31 December 2016

31 December 2015

Shares

US$

Shares

US$

Share capital at the beginning of the year

212,426,903

207,940,808

121,728,916

119,542,182

Share capital issued during the year

215,207

165,322

90,697,987

89,879,572

Conversion of C shares to ordinary shares  
during the year

Share redemptions

Share issue costs

108,019,980

100,273,000

(9,723,520)

(9,266,171)

–

–

–

–

–

–

–

(1,480,946)

Total share capital at the end of the year

310,938,570

299,112,959

212,426,903

207,940,808

52

 
 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

9.  SHARE CAPITAL continued

Issued Share Capital continued
C shares

31 December 2016

31 December 2015

Share capital at the beginning of the year

101,800,000

100,273,000

–

Shares

US$

Shares

US$

–

Issued share capital

–

–

101,800,000

101,800,000

Conversion of C shares to ordinary shares  
during the year

Share issue costs

Total share capital at the end of the year

(101,800,000)

(100,273,000)

–

–

–

–

–

–

–

(1,527,000)

101,800,000

100,273,000

In August 2015, 101,800,000 C shares were issued at an issue price of 100 cents per C share for cash consideration.

The conversion ratio was 1.0611 ordinary shares for every one C share held as at close on the conversion record date of 26 
January 2016. Entitlements to new ordinary shares were rounded down to the nearest whole share.

10.  EARNINGS PER SHARE

Weighted average number of ordinary shares

Proﬁt/(loss) for the ﬁnancial year

Basic and diluted earnings/(loss) per ordinary share

Weighted average number of C shares

Loss for the ﬁnancial period

Basic and diluted loss per C share

31 December 2016
Number of ordinary 
shares

31 December 2015
Number of ordinary 
shares

310,756,998

US$67,684,815
US$0.2178

189,598,173

(US$3,942,231)
(US$0.0208)

31 December 2016
Number of C shares

31 December 2015 
Number of C shares

–

–
–

101,181,818

(US$4,313,298)
(US$0.0426)

The weighted average number of ordinary shares as at 31 December 2016 and 31 December 2015 is based on the number 
of ordinary shares in issue during the period under review, as detailed in note 9.

11.  TRADE AND OTHER RECEIVABLES

Investment advisory fees payable (note 8)

Audit fees payable

Administration fees payable (note 8)

Sundry expenses payable

31 December 2016
US$

31 December 2015
US$

8,363

61,752

10,800

22,400

103,315

7,039

53,293

9,777

37,780

107,889

53

 
 
 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

12.  RECONCILIATION OF ACCOUNTING NAV AND PUBLISHED NAV PER SHARE

Published NAV

Fair value adjustment

NAV
US$
312,401,359

Number of
ordinary shares
No.
310,938,570

(717,464)

310,938,570

Financial statements NAV

311,683,895

310,938,570

NAV per
ordinary share
US$
1.0047

(0.0023)

1.0024

At 31 December 2015, there was no difference between the Accounting NAV of the Company and the published NAV of the 
Company.

13.  CONTINGENT LIABILITIES AND COMMITMENTS

The Company entered into a Subscription Agreement with the Master Fund and agreed to become a Limited Partner and 
made a commitment to the Master Fund of US$306,327,883 (31 December 2015: US$299,827,883).

At 31 December 2016 and 31 December 2015, the Company had no further outstanding commitments.

14.  SUBSEQUENT EVENTS

On 4 January 2017, the Company declared a monthly dividend of 5.75075 US cents per ordinary share in respect of the 
month ended 31 December 2016, which was paid on 2 February 2017. The ex dividend date was 12 January 2017.

On 10 January 2017, the Company announced that following consultations with Shareholders, it intends to proceed with the 
proposals under which Shareholders will be offered an option (but will not have an obligation) to extend the duration of their 
investment, and also with a further equity raise through a C share.

On 3 February 2017, the Company declared a monthly dividend of 0.7 US cents per ordinary share in respect of the month 
ended 31 January 2017, which was paid on 28 February 2017. The ex dividend date was 16 February 2017.

On 3 March 2017, the Company declared a monthly dividend of 0.7 US cents per ordinary share in respect of the month 
ended 28 February 2017, which was paid on 30 March 2017. The ex dividend date was 16 March 2017.

On 9 March 2017, the Company published a prospectus and circular in relation to the reorganisation proposal, share issue 
proposal and name change proposal.

On 28 March 2017, the Company announced 47,428,202 ordinary shares have been elected for re-designation as 2014 
shares at the Effective Date, representing 15.3% of the ordinary shares currently in issue. Consequently, 263,510,368 ordinary 
shares will be re-designated as 2017 shares, representing the balance of 84.7% of the ordinary shares currently in issue. 
Based on the above election results and the ordinary share price as at close of business on 27 March 2017, the 2017 share 
class would have an opening market capitalisation of approximately US$262.2 million.

On 28 March 2017, the Company announced they have applied for 47,428,202 2014 shares and 263,510,368 2017 shares 
to be admitted to trade on the Specialist Fund Segment of the Main Market of the London Stock Exchange. Admission will 
be effective at 8 a.m. on 5 April 2017.

On 29 March 2017, a resolution was passed to change the Company’s name from Fair Oaks Income Fund Limited to Fair 
Oaks Income Limited.

On  29  March  2017,  the  Company  announced  that  at  the  Extraordinary  General  Meeting  of  the  Company,  all  proposed 
resolutions were approved by shareholders.

54

 
 
 
FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2016

14.  SUBSEQUENT EVENTS continued

On 3 April 2017, the Company announced that the First Placing and Offer had raised US$68.85 million. The Company has 
also applied for 68,850,000 C shares to be admitted to trade on the Specialist Fund Segment of the Main Market of the 
London Stock Exchange. Admission will be effective at 8 a.m. on 5 April 2017.

The Company intends to invest substantially all of the net issue proceeds in Master Fund II following admission, subject to 
retaining appropriate levels of liquidity for working capital purposes. At the level of the Company, the assets representing the 
net proceeds of the issue will be accounted for and managed as a separate pool of C share assets, distinct from the assets 
attributable to the 2017 shares until their date of conversion into 2017 shares and distinct from the assets attributable to the 
2014 shares. It is currently anticipated that C shares issued pursuant to the issue will be converted into new 2017 shares 
(therefore merged with the existing 2017 share class) within 6 months from admission, although such conversion is entirely 
at the Directors’ discretion.

On 3 April 2017, the Company declared a monthly dividend of 0.7 US cents per ordinary share in respect of the month ended 
31 March 2017, which will be paid on 28 April 2017. The ex dividend date is 13 April 2017.

There were no other signiﬁcant events since the period end which would require revision of the ﬁgures or disclosures in the 
Financial Statements.

55

FAIR OAKS INCOME LIMITED (FORMERLY FAIR OAKS INCOME FUND LIMITED) ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Management and Administration

Administrator and Secretary 
Praxis Fund Services Limited
Sarnia House
Le Truchot
St Peter Port 
Guernsey GY1 1GR

Registrar
Capita Registrars (Guernsey) Limited
Mont Crevelt House
Bulwer Avenue
St Sampson
Guernsey GY2 4LH

Legal Advisers in United Kingdom
Stephenson Harwood LLP
1 Finsbury Circus
London EC2M 7SH

Bookrunner, Broker and Financial Adviser
Numis Securities Limited
10 Paternoster Square
London EC4M 7LT

Directors
Claudio Albanese (Independent non-executive Chairman) 
Jon Bridel (Independent non-executive Director)
Nigel Ward (Independent non-executive Director)

Registered Ofﬁce and Business Address
Sarnia House
Le Truchot
St Peter Port
Guernsey GY1 1GR

Investment Adviser 
Fair Oaks Capital Limited
67-68 Jermyn Street
London SW1Y 6NY

Legal Advisers in Guernsey
Carey Olsen
Carey House
Les Banques
St Peter Port
Guernsey GY1 4BZ

Custodian and Principal Bankers
BNP Paribas Securities Services S.C.A.
(appointed 15 December 2015)
BNP Paribas House
St Julian’s Avenue 
St Peter Port
Guernsey GY1 1WA

Independent Auditor
KPMG Channel Islands Limited
Glategny Court
Glategny Esplanade
St Peter Port
Guernsey GY1 1WR

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