Fair Oaks Income Limited Annual Report 2018

FY2018 Annual Report · Fair Oaks Income Limited
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FAIR OAKS INCOME LIMITED 

ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2018

FAIR OAKS INCOME 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 

Portfolio Statement (unaudited) 

Management and Administration 

1

2

3

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FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Highlights

•  Fair Oaks Income Limited’s (the “Company”) Net Asset Value 
(“NAV”)  per  2017  Shares  was  up  0.5%  and  the  NAV  per 
2014 Shares was up 5.2% for the year ended 31 December 
2018  on  a  total  return  basis  (with  dividends  reinvested). 
This  compares  to  the  Credit  Suisse  US  Leveraged  Loan 
Index, which was up 1.1% and the Credit Suisse US High 
Yield Index, which was down 2.4%.

•  As  at  31  December  2018,  the  Company’s  total  market 

Financial Highlights

2017 Shares

31 December 
2018 

31 December
2017

Total Net Assets 

US$396,310,795  US$418,947,430

Net Asset Value  
per share 

US$0.8742 

US$1.0016

capitalisation was US$377.5 million.

Share price at year end 

US$0.7925 

US$1.0513

•  The  Company’s  2014  and  2017  share  prices  closed  at  a 
mid-price  of  US$0.8300  and  US$0.7925  respectively  on  
31  December  2018  and  traded  at  an  average  annual 
premium to NAV of 0.82% and 7.74% respectively.

•  The  Company  declared  dividends  of  13.45  US  cents  per 
2017 Share in 2018, equivalent to a 17.0% dividend yield 
on  the  closing  mid-share  price  on  31  December  2018. 
Cumulative dividends since the inception of the Company 
per 2017 Share are 52.0 US cents.

•  The  Company  returned  US$0.5763  per  2014  share  to 
shareholders  through  compulsory  partial  redemptions  of 
2014  shares,  amounting  to  a  return  to  shareholders  of 
US$22.0 million.

(Discount)/premium  
to Net Asset Value 

Ongoing charges ﬁgure* 

2014 Shares

(9.35%) 

0.22% 

4.96%

0.37%

Total Net Assets 

US$19,308,254  US$47,003,051

Net Asset Value  
per share 

US$0.8800 

US$1.0108

Share price at year end 

US$0.8300 

US$1.1100

(Discount)/premium  
to Net Asset Value 

Ongoing charges ﬁgure* 

(5.68%) 

0.36% 

9.81%

0.31%

* Total ongoing charges, calculated in accordance with the AIC guidance, is at 
the  Company  level  only  for  the  year  divided  by  the  average  NAV  for  the  year. 
Charges of the underlying Master Fund and the Master Fund II are not included.

1

 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Summary Information

Principal Activity
Fair  Oaks  Income  Limited  (the  “Company”)  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”) and FOMC II LP (“the Master 
Fund II”), in both of which the Company is a limited partner.  
The Master Fund was registered in Guernsey on 7 May 2014 
and  the  Master  Fund  II  was  registered  in  Guernsey  on  24 
February  2017  under  The  Limited  Partnerships  (Guernsey) 
Law, 1995, as amended.

At  31  December  2018,  the  Company  has  21,942,137  2014 
Shares (“2014 Shares”) and 453,348,737 2017 Shares (“2017 
Shares”). The 2014 Shares invest solely into the Master Fund 
and  the  2017  Shares  invest  solely  into  Master  Fund  II.  The 
Company’s investment objective and policy mirror those of the 
Master Fund and Master Fund II. At 31 December 2018, the 
Company had direct holdings of 11.31% (31 December 2017: 
11.31%) in the Master Fund and 100% (31 December 2017: 
100%) holding in Master Fund II, which in turn had a holding 
of 62.82% (31 December 2017: 62.82%) in the Master Fund. 
The General Partner of the Master Fund and Master Fund II is 
Fair Oaks Income Fund (GP) Limited (the “General Partner” or 
“GP”). 

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

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  invest  (either 
directly  and/or  indirectly  through  the  Master  Fund  and/
or  Master  Fund  II)  in  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. 

The  Master  Fund  II  is  also  invested  into  Cycad  Investments 
LP  (“Cycad”).  Cycad  is  a  Limited  Partnership  registered  in 
the  United  States  of  America.  Aligned  with  the  Company’s 
investment policy, Cycad also invests into CLOs.

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 of Directors (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  Net 
Asset Value (“NAV”) in aggregate, and also of the NAV of each 
share class, 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.

2

FAIR OAKS INCOME 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  ﬁnancial 
year ending 31 December 2018. 

US bank loans generated a strong performance during the ﬁrst 
ten months of the year with the Credit Suisse Leveraged Loan 
index  up  +4.36%  through  October.  In  the  same  period,  the 
return of the US high yield index was ﬂat1 while the JP Morgan 
CLOIE B rated index was up +9.16%2. 

US  bank  loans  suffered  signiﬁcant  losses  in  November  and 
December 2018 as a result of outﬂows from mutual funds and 
other  open-ended  funds  (Figure  1.1).  Extreme  outﬂows  from 
open-ended funds were driven mainly by changes in interest 
rate expectations. 

Figure  1.1  –  Fund  ﬂows:  loan  mutual  funds  and  ETFs  (US$ 
billion) in 20183

4

2

0

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-4

-6

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-10

ETFs

Mutual Funds

Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18

Aug-18

Sep-18 Oct-18 Nov-18 Dec-18

CLO valuations were affected by the volatility in loan markets, 
despite  limited  CLO  trading  ﬂows  and  the  lack  of  negative 
fundamental news. As a consequence, the Company’s 2018 
performance followed a similar pattern to the loan market with 
the  positive  NAV  return  through  October  offset  by  negative 
valuations in November and December. 

For  the  full  year  2018,  the  high  yield  market  generated 
negative returns of -2.37% while loans, B rated CLOs and the 
Company’s 2017 Shares NAV ended the year with small gains 
(Table 1.2).

Table 1.2 – Total returns in 2018

2018 total return

Credit Suisse US High Yield Index

Credit Suisse US Leveraged Loan Index

J.P. Morgan Post-Crisis CLOIE B Index

The Company’s 2017 Shares NAV

-2.37%

1.14%

2.93%

0.54%

Despite the lack of negative Company speciﬁc news or large 
trading volumes, weakness in the listed fund sector impacted 
the  premium  to  NAV  at  which  the  Company  traded.  As  a 
result,  the  share  price  underperformed  NAV  and  the  2017 
Shares ended 2018 at a 9.35% discount to NAV, compared to 
a 4.96% premium at the end of 2017.

Figure 1.3 – Total return on 2017 Shares NAV and share price 
in 2018

2018 stats:
NAV of 2017 Shares: +0.54%
Share price of 2017 Shares: -13.56%

Jan-18

Apr-18

Jul-18

Oct-18

10.0%

5.0%

0.0%

-5.0%

-10.0%

-15.0%

Company 2017 Shares (share price)

Company 2017 Shares (NAV)

Performance attribution
The following factors affected performance in 2018:

Discount to NAV
The  main  negative  contributor  to  share  price  return  in  2018 
was  the  reversal  of  the  4.96%  premium  to  NAV  to  a  9.35% 
discount which contributed -13.63% to the share performance. 

CLO equity valuations and discount rates
Lower  valuations  of  CLO  equity  in  late  2018  also  impacted 
returns,  despite  the  strong  fundamental  performance  of 
the  underlying  investments.  While  expected  cash  ﬂows 
from  investments  did  not  change  signiﬁcantly,  we  estimate 
that  higher  discount  rates  used  by  the  market  in  late  2018 
contributed -9.50% to the NAV performance4.

1Credit Suisse High Yield index from December 2017 to October 2018.
2JP Morgan CLOIE index returns from December 2017 to October 2018.
3Data from LIPPER.
4Estimate based on the difference between actual, third party valuations as at 31 December 2018 and the valuation of the CLO equity portfolio as at 31 December 2018 based on 
the estimated discount rates of the same assets as at 29 December 2017. 

3

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Chairman’s Statement (continued)

Performance attribution (continued)
Distributions received relating to the 2018 ﬁnancial year
The  Company  received  US$54.8  million  in  distributions  from 
its investments. Distributions were healthy and should beneﬁt 
from loan spread volatility in the future.

The Company received US$54.8 million of income distributions 
from  the  Master  Funds8  relating  to  the  2018  ﬁnancial  year. 
The  Company  also  received  US$17.4  million  of  principal 
distributions from the Master Fund which was distributed back 
to  shareholders  of  the  2014  Shares  by  compulsory  partial 
redemption in July, October and December 2018. 

Other factors
The  following  factors  also  impacted,  to  a  lesser  extent,  the 
Company’s share and NAV performance in 2018:

Figure  1.5  –  Cumulative  dividends  per  share  since  inception 
(US cents per share):

•  A volatile basis between one-month and three-month Libor 
impacted  distributions  and  valuations  negatively  as  the 
underlying loan borrowers opted to pay interest based on 
one-month  Libor  whereas  the  CLO  liabilities  continued  to 
use three-month Libor as a benchmark;

•  tighter loan spreads in early 2018 resulted in a lower funding 
arbitrage  for  CLO  equity  investments  in  the  Company’s 
portfolio.

Figure 1.4 – Difference in weighted average asset spread and 
weighted average cost of CLO ﬁnancing in Master Fund II5&6.

2014 Shares

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Dec-18
1.69%

2017 Shares

Jan-18
1.69%

1.70%

1.69%

1.68%

1.67%

1.66%

1.65%

1.64%

1.63%

1.62%

1.61%

Jan-18

Mar-18

May-18

Jul-18

Sep-18

Nov-18

Cash ﬂow and dividends
The  Company  declared  a  0.70  US  cents  per  share  dividend 
monthly from January to November and on 10 January 20197 
announced a ﬁnal interim dividend of 4.26 US cents per 2014 
Share and 3.45 US cents per 2017 Share in respect of the year 
ended 31 December 2018. Full year dividends totalled 11.96 
US  cents  and  11.15  US  cents  per  2014  and  2017  ordinary 
share respectively, equivalent to a 14.4% and 14.1% dividend 
yield on the closing mid-share price on 31 December 2018.

52c

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Material events
On 2 February 2018, the Company announced that application 
had  been  made  to  the  London  Stock  Exchange  for  73,799 
2017 Shares to be admitted on the Specialist Fund Segment of 
the Main Market. The new 2017 Shares were issued pursuant 
to  the  Company’s  scrip  dividend  alternative  in  respect  of 
the  December  2017  dividend  and  rank  pari-passu  with  the 
existing issued 2017 Shares. Dealings in the new 2017 Shares 
commenced on 9 February 2018. Following admission, there 
were 418,348,737 2017 Shares in issue. 

5Weighted average asset spread based on loan par value weighted by Master Fund II’s proportional ownership of Income Notes. Source: Intex.
6Based on CLO liability spreads weighted by Master Fund II’s proportional ownership of Income Notes. Source Intex.
7In accordance with IAS 10, this ﬁnal interim dividend has not been included within these Financial Statements.
8References to Master Funds refer to FOIF LP (“Master Fund”) and FOMC II (Master Fund II). Master Fund refers to the underlying investments of the 2014 share class and Master 
Fund II refers to the underlying investments of the 2017 share class.

4

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Chairman’s Statement (continued)

Material events (continued)
On 14 March 2018, the Company announced, in light of the 
current  pipeline  of  investment  opportunities  and  an  investor 
commitment received for 22.5 million 2017 Shares, that new 
2017  Shares  (“New  Shares”)  were  being  made  available, 
conditional on the result of an EGM of the Company convened 
for 29 March 2018. The proceeds of this placing were intended 
to  be  used  as  funding  for  a  newly  originated  opportunity  to 
make a primary investment of approximately US$35 million in 
a CLO equity security. 

On 3 April 2018, the Company announced, that following the 
reconvened EGM from 29 March 2018, that it had resolved, 
to issue 35 million new 2017 Shares (the “New Shares”) at an 
issue price of US$0.973. The New Shares were admitted to 
trading  on  the  Specialist  Fund  Segment  of  the  Main  Market 
on  4  April  2018.  Following  the  issue,  the  Company  had 
453,348,737 2017 Shares in issue. 

On  6  July  2018,  the  Company  returned  US$6.5  million 
(equivalent  to  13.978  US  cents  per  share)  by  way  of  a 
compulsory  partial  redemption  of  2014  Shares  (the  “Fourth 
Redemption”). The Fourth Redemption was effected at 90.71 
US cents (being the NAV per 2014 Share as at 31 May 2018 
less the monthly interim dividend of 0.7 US cents declared on 
5  June  2018).  Following  the  redemption,  the  Company  had 
39,335,595 2014 Shares in issue. 

On  3  October  2018,  the  Company  returned  US$12.5 
million  (equivalent  to  31.778  US  cents  per  share)  by  way  of 
a  compulsory  partial  redemption  of  2014  Shares  (the  “Fifth 
Redemption”). The Fifth Redemption was effected at 88.85 US 
cents (being the NAV per 2014 Share as at 31 August 2018 
less the monthly interim dividend of 0.7 US cents declared on 
6 September 2018). Following the redemption, the Company 
had 25,266,955 2014 Shares in issue.

On 18 October 2018, the Company announced that Fair Oaks 
Income Fund (GP) Limited (the general partner of the Master 
Fund  and  Master  Fund  II)  had  purchased  285,355  2017 
Shares in the secondary market, in line with its commitment 
to reinvest 25% of quarterly management fees in the event the 
2017 Shares trade at a discount to NAV on the day the quarter 
end NAV is published. 

On  13  December  2018,  the  Company  returned  US$3.0 
million  (equivalent  to  11.873  US  cents  per  share)  by  way  of 
a  compulsory  partial  redemption  of  2014  Shares  (the  “Sixth 
Redemption”).  The  Sixth  Redemption  was  affected  at  90.23 
US  cents  (being  the  NAV  per  2014  Share  as  at  31  October 
2018  less  the  monthly  interim  dividend  of  0.7  US  cents 

declared on 30 October 2018). Following the redemption, the 
Company had 21,942,137 2014 Shares in issue.

On  14  December,  the  Company  announced  that  following 
the  Sixth  Redemption  and  given  the  capital  returned  to 
2014  Shareholders  and  the  reduced  market  capitalisation 
of  the  2014  Shares,  the  Board  was  considering  whether 
an  early  redemption  of  the  2014  Shares  (offering  qualifying 
shareholders  the  opportunity  to  exchange  their  shares  for  a 
direct  interest  in  the  Master  Fund  or,  alternatively,  to  receive 
their NAV in cash immediately) may be in the best interests of 
the 2014 Shareholders.

Subsequent events
On  13  March  2019,  the  Company  announced  a  ﬁnal 
compulsory  redemption  of  all  2014  Shares  at  a  price  equal 
to the NAV per 2014 Share as at 28 February 2019 less the 
dividend  to  be  declared  for  the  month  ended  28  February 
2019 (the “Redemption Price”).

The  consideration  for  the  redemption  was,  as  default,  a  US 
Dollar cash payment. This cash payment was funded by the 
Master  Fund  II  acquiring  at  NAV  the  residual  interest  in  the 
Master  Fund  owned  by  the  Company  in  respect  of  2014 
Share class. There was also an option to receive an in specie 
distribution of a 2014 Shareholder’s pro rata exposure to the 
Company’s interest in the Master Fund. All holdings of 2014 
Shares on the register at the close of business on the record 
date, being 1 April 2019, will be redeemed. 

On  15  March  2019,  the  Company  announced  the  ﬁnal 
Redemption Price per 2014 Shares of US$0.8155 being the 
NAV per 2014 Share as at 28 February 2019 of US$0.8225 
less the 0.7 US cent dividend declared for that month.

On  3  April  2019,  the  Company  announced  with  regards  to 
the ﬁnal redemption of 2014 Shares, as noted above, that the 
rate  per  share  to  be  used  to  pay  shareholders  who  elected 
to  receive  their  redemption  proceeds  in  sterling  will  be  GBP 
0.6191  per  share.  It  is  expected  that  the  proceeds  of  the 
redemption will be paid through CREST to holders of Shares 
in uncertiﬁcated form, and by cheque to holders of Shares in 
certiﬁcated form on 15 April 2019.

Furthermore,  the  Company  notiﬁed  that  its  issued  share 
capital now consists of 453,348,737 2017 Shares only, further 
to the ﬁnal redemption of 21,942,137 2014 Shares effected on 
1 April 2019. None of these 2017 Shares are held in Treasury, 
therefore, the total number of 2017 Shares with voting rights 
in  the  Company  is  453,348,737.  The  2014  Shares  are  now 
disabled on CREST and the line of stock cancelled.

5

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Chairman’s Statement (continued)

Outlook
The  Company  expects  to  continue  to  beneﬁt  from  a  low 
default rate in the loan portfolios of its CLOs. Master Fund II’s 
annualised default rate from inception to the end of December 
was 0.16%9, compared to an annualised default rate for the 
same period in the US loan market of 1.50%10. The Company 
also expects the Master Funds to continue to actively reﬁnance 
or reset its control CLO equity investments to ensure that the 
funding arbitrage in the portfolio is maximised. 

The Fund’s CLO investments beneﬁt from low, long-term, non-
recourse ﬁnancing at a weighted average rate of Libor +1.67% 
as at the end of December 2018. The ﬁnancing spread is ﬁxed 
but can be reduced by reﬁnancing. Volatility in loan markets is 
expected to beneﬁt the Company’s portfolio as CLOs reinvest 
in loans at wider spreads resulting in higher distributions to the 
CLO equity investments.

We  expect  the  Company’s  limited  maturity  and  discount 
management provisions to continue to support its share price. 

Professor Claudio Albanese
Chairman

10 April 2019

9Master Fund II’s annualised default rate includes Master Fund II’s share of the Master Fund from inception in June 2014.
10S&P Leveraged Loan index default rate by principal amount.

6

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Investment Adviser’s Report

Portfolio Update
The 2017 Shares, as at 31 December 2018, via their investment 
in Master Fund II1 held twenty-two CLO equity positions and 
three B rated CLO mezzanine investments offering exposure 
to 1,182 loan issuers2 and ﬁfteen CLO managers. Control CLO 
equity positions represented 95.0% of the portfolio.

Figure 2.1 – CLO manager diversiﬁcation of Master Fund II3

17%

p oint (4)
AI M

C

18%

16%

14%

12%

10%

8%

6%

4%

2%

0%

A rro w

Portfolio stats (31 December 2018):
25 investments
23 CLOs
15 managers
1,182 issuers2

10% 10% 10%

9%

8% 8%

6% 6%

5%

4%

3%

3%

2%

A re s  C a pital (1)
Alle gro (1)
W ellﬂ e et (1)
P o st A d vis ory (1)
N e u b erg er B er m a n (2)
S In v e st m e nt P artn ers (2)
M arin er (4)
O  (2)
Alc e ntra (2)

A

P

H

M

M

G   C re dit (1)
C  (1)

A x a I M  (1)
S y m

T P

p h o n y (1)

Figure 2.3 – CLO manager diversiﬁcation of the Master Fund5

35%

30%

25%

20%

15%

10%

5%

0%

A rro w

30%

22%

Portfolio stats (31 December 2018):
12 investments
11 CLOs
9 managers
1,012 issuers5

10%

9%

8%

7%

7%

4%

p oint (3)

N e u b erg er B er m a n (2)

C  (1)

M

M

A

Alc e ntra (1)

O  (1)

C

AI M

G   C re dit (1)

T P

A x a I M  (1)

S y m

p h o n y (1)

2%

3i (1)

1%

3i (1)

Figure 2.4 – Portfolio composition of the Master Fund6

Mezzanine Notes (no control)
6.8%

Mezzanine Notes (control)
2.3%

Subordinated Notes 
(no control)
2.2%

Figure 2.2 – Portfolio composition of Master Fund II4

Mezzanine Notes (control)
2.2%

Subordinated Notes 
(no control)
0.7%

Mezzanine Notes (no control)
2.2%

Subordinated
Notes (control)
95.0%

The 2014 Shares, as at 31 December 2018, via their investment 
in the Master Fund, had exposure to ten CLO equity positions 
and two B rated CLO mezzanine investments offering exposure 
to 1,012 loan issuers and nine CLO managers. 

Subordinated
Notes (control)
88.8%

The  Master  Fund  exited  two  control  equity  investments 
(Covenant  Credit  Partners  CLO  II  and  Ares  XXXV).  Fifteen 
CLO mezzanine positions in the Master Fund were repaid at 
par in 2018 and the Master Fund sold seven CLO mezzanine 
positions  at  a  weighted  average  price  of  98.3  US  cents  (the 
seven mezzanine investments were purchased at a weighted 
average  purchase  price  of  79.5  cents).  Principal  proceeds 
received  by  Master  Fund  II  were  reinvested  while  US$17.4 
million proceeds received by the Company on behalf of 2014 
Shareholders were used to redeem 2014 Shares.

1References to “Master Fund II” refer to the underlying investment of the 2017 Shares and the “Master Fund” refer to the underlying investments of the 2014 Shares.
2Based on the underlying loans in CLOs in which Master Fund II holds equity.
3Based on nominal holding per CLO manager, as at 31 December 2018.
4Based on December 2018 valuations of portfolio.
5Based on the underlying loans in CLOs in which Master Fund holds equity.
6Based on December 2018 valuations of the portfolio.

7

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Investment Adviser’s Report (continued)

Portfolio Update (continued)
Master Fund II reinvested principal proceeds and new capital raised across ﬁve new CLOs (Table 2.5).

Table 2.5: New purchases in 2018 by Master Fund II

Purchase  
date

Nominal  
(US$)

Deal name

CLO manager

CLO Loan 
portfolio 
spread

US loan 
market 
spread7

AAA cost  
of funding in 
the CLO

US primary 
market AAA 
CLO8

April 2018

39,282,500

Post CLO 2018-1

Post Advisory Group

353bps

347bps

105bps

108bps

May 2018

28,875,000

Wellﬂeet CLO 2018-1

June 2018

26,000,000

Ares XXXVR CLO

June 2018

30,000,000

Shackleton  
2018-XII CLO

Wellﬂeet Credit 
Partners

Ares CLO 
Management

336bps

346bps

110bps

109bps

339bps

345bps

105bps

111bps

Alcentra NY

336bps

345bps

107bps

111bps

August 2018

31,687,5009

HPS Loan Management  
13-2018

HPS Investment 
Partners

339bps

347bps

116bps

119bps

Loan Market Update10
While  we  continue  to  be  cautious  about  credit  quality  in  the 
loan  market,  average  leverage  of  US  loans  decreased  from 
5.2x in Q3 2017 to 5.0x in Q3 2018 (Figure 2.6)11 while interest 
coverage was robust at 3.5x as at Q3 2018 (Figure 2.7)11.

Figure 2.6 – Average leverage of outstanding loans11

Average

Weighted average

6.5

6

5.5

5

4.5

4

3.5

3

2.5

2

3Q15

4Q15 1Q16 2Q16 3Q16

4Q16 1Q17 2Q17 3Q17 4Q17

1Q18 2Q18 3Q18

Figure 2.7 – Average cash-ﬂow coverage of outstanding loans12

Average

Weighted average

4

3.5

3

2.5

2

1.5

1

0.5

0

3Q15

4Q15 1Q16 2Q16 3Q16

4Q16 1Q17 2Q17 3Q17 4Q17

1Q18 2Q18 3Q18

The rolling twelve-month default rate increased to 2.42% in Q1 
2018,  after  Clear  Channel  Communications  ﬁled  for  Chapter 
11,  but  closed  the  year  at  1.63%13.  In  total,  29  companies 
defaulted on US$40.9bn of debt in 2018. Excluding the default 
from  Clear  Channel  Communications,  which  represented 
US$16bn  or  38%  of  total  volume,  default  activity  was  the 
lowest since 201314.

The  top  three  sectors  contributing  to  2018’s  defaults  were 
Energy (29%), Retail (23%) and Consumer Products (10%)15.

7Based on average loan spreads from Credit Suisse Leveraged Loan index on purchase date of the investment.
8Based on AAA CLO primary spreads from JP Morgan on purchase date of the investment.
9Total includes the mezzanine portion that Master Fund II also acquired in the CLO.
10US loan issuance, ﬁrst-lien spreads and fund ﬂows from LPC & Lipper: Reﬁnitiv – Leveraged loan market overview, as at 31 December 2018.
11S&P/LSTA Loan index to Q3 2018.
12S&P/LSTA Loan index to Q3 2018.
13Twelve-month US default rate by principal amount from S&P/ LSTA Leveraged Loan index.
14JP Morgan Morning Intelligence, as at 31 December 2018.
15US loan issuance, ﬁrst-lien spreads and fund ﬂows from LPC & Lipper: Reﬁnitiv – Leveraged loan market overview, as at 31 December 2018.

8

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Investment Adviser’s Report (continued)

Loan Market Update (continued)
The  distressed  ratio  in  the  US  and  Europe,  deﬁned  as 
percentage of loans trading below 80c, continues to be well 
below the historical averages (Figure 2.8).

Figure 2.8 – Distressed ratio: Euro vs US loans16

US (S&P/LSTA LL Index)

Europe (S&P ELLI)

90.00%

80.00%

70.00%

60.00%

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

Dec-08

Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18

As a consequence, according to a quarterly survey published 
by S&P Global Intelligence in December 201817, loan managers 
expect the default rate to reach 2.16% in December 2019 (see 
Figure  2.9).  From  the  same  survey  performed  in  December 
2017, loan managers had predicted a higher default rate for 
December 2019 at 2.65%.

Figure 2.9 - Lagging twelve-month default rate: historical and 
current expectations (forecast through to December 2019)17

5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0.0%

Dec-19
2.2%

Dec-18
1.6%

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15

Dec-16

Dec-17

Dec-18

Dec-19

Historical

Projected

The market’s low default expectations are also supported by 
the very limited amount of loans set to mature over the next 
three years. The notional of loans maturing in 2019-2021 has 
fallen from US$572 billion in 2015 to US$102 billion in 201818.

Figure 2.10 – Maturity wall of the US loan market of performing 
loans in 2018 (US$ billion)18

$400

$350

$300

$250

$200

$150

$100

$50

$0

$351

$326

$208

$118

$69

$0

$8

$25

$31

2018

2019

2020

2021

2022

2023

2024

2025

2026

Loan  recovery  rates,  however,  will  likely  be  inﬂuenced  by 
prevalence of covenant-lite (“cov-lite”) loans. The dominance 
of cov-lite loans and their impact on defaults and recoveries 
was the subject of signiﬁcant press coverage in 2018. 

Cov-lite loans have become the market standard (Figure 2.11) 
and unrealistic investment constraints insisting on investment 
in  loans  with  maintenance  covenants  may  force  managers 
to  invest  in  weaker  issuers  (which  are  unable  to  issue  under 
market standard terms). 

Figure 2.11 – Percentage of cov-lite loans in institutional loans19 

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

85%

75% 76%

72%

70%

62%

29%

37%

26%

8%

9%

5%

4%

1% 0%

2%

2003

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

16Based on S&P/LSTA Leveraged Loan Index and S&P European Leveraged Loan Index Distress Ratio by principal amount. Date as at Q4 2018.
17S&P Global Intelligence default survey as at December 2018.
18S&P Global Intelligence, Q4 2018. Distribution by year of maturity.
19S&P Global Intelligence.

9

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Investment Adviser’s Report (continued)

Loan Market Update (continued)
In our view, the prevalence of cov-lite loans is likely to result 
in  lower  default  rates,  lower  recoveries  and  lower  spreads. 
There will be lower default rates as higher quality companies 
which may have breached maintenance covenants in previous 
cycles, do not default. Recoveries will be lower as the higher 
recovery  rates  from  issuers  that  do  not  default  are  excluded 
from the average. Finally, a reduced ability to demand margin 
increases in exchange for covenant waivers will result in lower 
spreads. 

loans,  our  current  concerns  on 

Beyond  cov-lite 
loan 
documentation  include  weaker  incurrence  covenants  and 
excessive EBITDA adjustments, which result in under-reported 
leverage.

A  review  of  loan  markets  in  2018  would  not  be  complete 
without a comment on the volatility experienced in November 
and December. 

A  combination  of  negative  credit  headlines  and  a  change 
in  investor  expectations  regarding  future  US  interest  rates 
resulted in large withdrawals from open-ended loan funds in 
what  traditionally  are  slow  weeks  around  the  Thanksgiving 
holidays and pre-Christmas period.

Bank  loan  investors  are  predominantly  long-term,  closed-
ended vehicles such as collateralised loan obligations (“CLOs”). 
Since  August  2012,  long-term,  non-mark-to-market  capital 
provided by CLOs has represented between 41% and 51% of 
the US loan market20. Open-ended loan funds and ETFs have 
accounted  for  between  12%  and  23%  of  the  market  during 
the  same  period20.  Despite  their  small  relative  size,  open-
ended funds and ETFs have the potential to represent a large 
percentage of trading volumes at times of volatility because of 
the shorter-term nature of their investors. This means that they 
can have an outsized impact on average US loan prices.

Loan fund outﬂows in November 2018 reached US$4.1 billion, 
the  largest  monthly  selling  volume  since  December  201521. 
Outﬂows  then  increased  to  US$11.6  billion  in  December21. 
As  a  result,  the  US  loan  market  total  return  was  -0.82%  in 
November and -2.29% in December 201822. As the size of fund 
outﬂows reduced and opportunistic loan investors entered the 
market, US loans returned +2.30% in January 201922.

CLO Market Update23
2018  US  CLO  new  issuance  was  up  10%  from  2017  to 
US$129.7 billion while European CLO new issuance was up 
34% from 2017 to €27.0 billion. 

The  ﬁrst  three  quarters  of  2018  were  unusual  in  that  the 
expected self-regulating mechanism provided by CLOs (lower 
arbitrage should reduce CLO issuance, reducing demand for 
loans and, hence, resulting in a wider arbitrage) seemed to be 
absent. 

The  spread  of  the  Credit  Suisse  Leveraged  Loan  index  fell 
from  Libor+4.16%  as  at  31  December  2017  to  Libor+3.81 
as  at  28  September  1824.  The  spread  of  BB  rated  loans  (a 
more appropriate proxy for CLO’s higher average credit quality 
holdings),  also  fell  from  Libor+2.68%  to  Libor+2.55%  in  the 
same period25. 

Strong  CLO  new  issuance,  which  exceeded  $10  billion  per 
month  on  each  month  except  January  and  September 
resulted  in  wider  US  CLO  AAA  liabilities  (from  Libor+1.15% 
as at 31 December 2017 to Libor+1.20% as at 28 September 
201826) and made CLO arbitrage more challenging in the ﬁrst 
three quarters of 2018 (Figure 2.12).

Figure  2.12:  US  CLO  new  issuance  volume  and  market 
arbitrage on BB loan spreads in 201827

300bps

250bps

s
O
L
C
n

i

e
g
a
r
t
i
b
r
a

t
e
k
r
a
M

200bps

150bps

100bps

50bps

0bps

$16B

$14B

$12B

$10B

$8B

$6B

$4B

$2B

$0B

l

e
m
u
o
v
O
L
C
S
U

Jan-18

Mar-18

May-18

Jul-18

Sep-18

Nov-18

US CLO new issuance (RHS)

Arbitrage in CLOs (LHS)

Although  it  is  tempting  to  conclude  from  Figure  2.12  that  the 
CLO arbitrage was particularly compelling at the end of 2018, 
this  view  was  largely  theoretical  given  the  impossibility  of 
ramping up and pricing a CLO during the last weeks of the year. 

20Lipper, Reﬁnitiv: Leveraged Loan monthly, November 2018.
21Lipper. Reﬁnitiv: Leveraged Loan to December 2018.
22Total return of Credit Suisse Leveraged Loan index.
23CLO issuance from JP Morgan, as at 31 December 2018.
24Based on 3-year loan discount margin from Credit Suisse Leveraged loan index.
25Based on 3-year loan discount margin of BB rated loans from Credit Suisse Leveraged loan index.
26US CLO AAA spreads from JP Morgan during 2018.
27US CLO issuance and primary AAA CLO spreads from JP Morgan. Loan spreads from Credit Suisse Leveraged Loan index.

10

 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Investment Adviser’s Report (continued)

CLO Market Update (continued)
Master Fund II continued to identify and take advantage of investment opportunities in a very selective manner. All ﬁve investments 
in 2018 beneﬁtted from conservative portfolios with attractive AAA ﬁnancing levels, as shown earlier in Table 2.5.

As a longer term comparison, the table below illustrates the arbitrage present in the Master Fund’s ﬁrst investment in August 2014 
and the last of Master Fund II’s investments closed in 2017 and 2018.

Table 2.13 – Historical arbitrage

Trade date

Initial average loan portfolio spread

Difference vs 2014

AAA Spread

AA Spread

Weighted average cost of funding

Difference vs 2014

First CLO Control  
Investment

Last 2017 CLO  
Control Investment

AWPT 2014-3

14 August 2014

Mariner 2017-4

3 October 2017

Last 2018 CLO  
Control Investment

HLM 13X-2018

27 September 2018

3.74%

1.55%

2.35%

2.32%

3.47%

(-27bps)

1.22%

1.72%

1.82%

(-50 bps)

3.39%

(-35 bps)

1.16%

1.70%

1.70%

(-62 bps)

Enhanced returns via active control investments
Investments  in  control  CLO  equity  positions  give  the  Master 
Funds  the  ability  to  optimise  CLO  investments,  control  their 
lifecycle and actively manage credit risk. CLO investments in 
more  conservative  loan  portfolios,  with  lower  spreads,  can 
generate higher returns based on reduced CLO manager fees 
and arranger fees.

Furthermore, a control position combined with independence 
ensures  that  CLOs  can  be  reﬁnanced  or  liquidated  at  the 
optimal point for the investors.

investments  beneﬁt 

Positioned to beneﬁt from market volatility 
CLO  equity 
long-term,  ﬁxed-
from 
spread liabilities and the option to reinvest principal proceeds 
during  the  CLO’s  investment  period  (typically  four  to  ﬁve 
years).  Master  Fund  II’s  CLO  investments  beneﬁt  from  tight 
borrowing spreads, which have the potential to enhance the 
initial  arbitrage  as  higher-spread  assets  become  available.  
As principal repayments are reinvested in new loans with wider 
spreads, the incremental interest income over the ﬁxed cost of 
ﬁnancing will beneﬁt CLO equity investors. 

Outlook 
We will continue to seek the best risk-adjusted opportunities 
for  Master  Fund  II  in  the  CLO  equity  and  debt  primary  and 
secondary  markets.  Low  new  issuance  in  early  2019  has 
resulted  in  limited  visibility  to  date  in  terms  of  pricing  of 
new  issue  CLO  liabilities  while  wider  spreads,  particularly  in 
sub-investment  grade  CLO  liabilities  could  create  buying 
opportunities for the Company. 

We believe that the Company continues to offer a compelling 
investment opportunity for those investors looking to invest in 
global senior secured bank loans through CLOs:

One  of  the  most  attractive  relative  value  opportunities  within 
private credit markets
CLO equity and debt are effective ways to invest in portfolios 
of higher quality senior secured loans to established borrowers 
using long-term, non-recourse, non-mark-to-market ﬁnancing 
at  attractive  levels.  A  combination  of  low  expected  defaults 
and loan price volatility has the potential to be very supportive 
of existing CLO equity investments which will beneﬁt from their 
low ﬁxed cost of ﬁnancing. 

Diverse and high quality existing portfolio
The  Company,  through  its  investment  in  Master  Fund  II, 
holds exposure to a seasoned and diversiﬁed portfolio of 25 
investments in 23 CLOs managed by 15 different managers, 
giving a total exposure to 1,182 loan issuers28. 

28Based on the underlying loans in CLOs in which Master Fund II holds equity.

11

 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Investment Adviser’s Report (continued)

Outlook (continued)
Discount management provisions 
The Company beneﬁts from the ﬁxed investment period and 
maturity of Master Fund II. We believe that the limited life of the 
Company has expanded its shareholder base and supported 
investments by investors able to hold the shares “to maturity” 
at times when the shares have traded at a discount to NAV. 
In  addition,  the  shares  beneﬁt  from  the  Company’s  buy-
back program and the investment manager’s commitment to 
reinvest 25% of management fees on a quarterly basis if the 
shares trade at a discount.

Experienced team and strong alignment of interest
Our senior investment team has an average of over 20 years’ 
corporate  credit  and  securitisation  experience  dedicated  to 
sourcing,  analysing,  negotiating,  selecting  and  monitoring 
corporate  credit  investments.  We  believe  that  our  active 
monitoring of the portfolio and superior access to credit views 
and  analysis  has  enabled  us  to  outperform,  with  the  Master 
Fund  (earliest  vehicle)  experiencing  annualised  default  rates 
since  inception  in  June  2014  to  the  end  of  2018  of  0.22% 
compared to an annualised default rate for the same period in 
the US loan market of 1.50% at the end of 2018.

The  Company  beneﬁts  from  a  meaningful  co-investment  by 
the Investment Adviser and the back-ended performance fee 
which will only be triggered once investors in the Master Fund 
have received their original investment plus minimum return, in 
cash, ensuring our focus on performance.

Fair Oaks Capital Limited
10 April 2019

12

FAIR OAKS INCOME 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  of  the  Board  and 
Chairman of the Management Engagement Committee) 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) 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,  a  chartered  director 
and fellow of 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 and Chairman 
of  the  Nomination  and  Remuneration  Committee)  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 The International Stock Exchange (“TISE”) listings. Nigel is 
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.

13

FAIR OAKS INCOME 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

Stock Exchange

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

*to retire from directorship on 30 June 2019. 

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

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
London Stock Exchange – Main Market

14

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Directors’ Report

The Directors of the Company are pleased to submit their Annual Report and the Audited Financial Statements (the “Financial 
Statements”) for the year ended 31 December 2018. 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
After a review of the Company’s holdings in cash and cash equivalents, investments and a consideration of the income deriving 
from, and the viability of, 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 principal 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  Funds’  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 Funds’ 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. 

15

FAIR OAKS INCOME 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 from the date of 
signing this report to April 2022, 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 April 2022 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. 

During  the  year  ended  31  December  2017,  the  Company  implemented  proposals  which  included  shareholders  being  offered 
an option to extend the duration of their investment beyond the planned end date of the Master Fund. As such, the Company 
re-designated 263.5 million Ordinary Shares to a 2017 Share class and 47.4 million Ordinary Shares into a 2014 Share class. 
The 2014 Shares remained invested in the Master Fund, with the 2017 Shares invested and having exposure to the Master Fund 
II. The Master Fund II has a planned end date of June 2024 and an investment objective and policy substantially similar to that 
of the Master Fund. In addition, during February 2019, the General Partner extended the life of the Master Fund by one year in 
accordance with the terms of the Limited Partnership Agreement. The Master Fund now has a planned end date of 27 May 2020.

During April 2018, the Company issued 35 million new 2017 Shares (the “New Shares”) at an issue price of US$0.973. The New 
Shares were admitted to trading on the Specialist Fund Segment of the Main Market on 4 April 2018. The proceeds of this placing 
were used as funding for a newly originated opportunity in a primary investment of approximately US$35 million in a CLO equity 
security.

In making their three year assessment, various factors, in addition to the 2017 restructuring, the fund raising event and the Master 
Fund term extension detailed above, were 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 April 2022.

Results and Dividends
The results for the year are shown in the Statement of Comprehensive Income on page 33.

The Board declared dividends of US$66,266,595 during 2018 followed by an additional dividend declaration of US$16,604,865 
declared on 10 January 2019 in relation to the year ended 31 December 2018 (dividends declared in relation to the year ended  
31 December 2017: US$45,938,481). 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  and  Master  Fund  II  in  the  relevant  ﬁnancial  period  attributable  to 
the Company’s investment in the Master Fund and Master Fund II, and Qualifying Short Term Investments less expenses of the 
Company.

16

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Directors’ Report (continued)

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.

Custody Arrangements
The  Company’s  underlying  assets  in  the  Master  Fund  and  the  Master  Fund  II  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, is set out in note 8 of the Financial Statements. 

The Company’s underlying assets in the Master Fund and the Master Fund II 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 2018, the credit rating of the Custodian was Aa3 as rated by Moody’s (31 December 2017: A2) and A 
by Standard & Poor’s (31 December 2017: A).

Directors and Directors’ Interests
The Directors, all of whom are independent and non-executive, are listed on page 13.

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 £43,000 (31 December 2017: £43,000) each per annum. The fee was increased with 
effect from 1 April 2017.

The Directors had the following interests in the Company at 31 December 2018 and 31 December 2017, held either directly or 
beneﬁcially:

Name

Claudio Albanese (Chairman)

Jon Bridel

Nigel Ward

31 December 2018

31 December 2017

No. of 2017
Shares

9,697

9,697

44,475

Percentage

0.00%

0.00%

0.01%

No. of 2017
Shares

9,697

9,697

29,475

Percentage

0.00%

0.00%

0.01%

On 4 December 2018, Nigel Ward purchased 15,000 2017 Shares in the Company on the SFS of the London Stock Exchange.

17

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Directors’ Report (continued)

Substantial Shareholdings
As at 21 March 2019, being the date of the latest shareholder analysis prior to the publication of these Financial Statements, the 
following 2017 shareholders had holdings in excess of 5% of the issued 2017 share capital:

Name

Quilter Investors

Coller Investment Management

Vidacos Nominees Limited – Master2

Fidelity International

Smith & Williamson Wealth Management 

No. of 2017 Shares

Percentage of 2017 Shares

70,913,498

54,159,716

43,000,000

28,534,697

27,126,772

15.64%

11.95%

9.48%

6.29%

5.98%

On 1 April 2019, the ﬁnal compulsory redemption of all 2014 Shares was complete, see the Chairman’s Statement and Note 14 
for details.

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

Listing Requirements
Since being admitted to the SFS of the London Stock Exchange on 12 June 2014, 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).

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 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. Reporting under CRS in Guernsey is completed on a annual basis.

18

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Directors’ Report (continued)

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  2018.  
In January 2017, the Company was authorised to market in Sweden, Finland and Luxembourg.

The Company issued a new prospectus on 9 March 2017, the Master Fund II was subsequently launched and invested into by 
the Company during 2017 as discussed further on page 2. New principal documents were entered into during this period and all 
matters were disclosed to investors as required under Article 23 of AIFMD. As the Board of the Company is the AIFM, the details of 
the Company’s remuneration policy for the Directors is outlined on page 25 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.

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

10 April 2019

19

FAIR OAKS INCOME 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.

The Board also acknowledges the new AIC Code of Corporate Governance which was issued in February 2019 (the “2019 AIC 
Code”) and notes that the 2019 AIC Code is effective for ﬁnancial periods beginning on or after 1 January 2019. During the year 
ended 31 December 2019, the Board intend to review their policies and procedures against the new 2019 Code and comply or 
explain against the relevant provisions.

For the year ended 31 December 2018, 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, and any additional requirements set out in the 2019 
AIC Code, throughout the year ending 31 December 2019, 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.

Composition and Independence of Directors
As at 31 December 2018, 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 13.

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

Jon Bridel is the Chairman of the Audit Committee.

Nigel Ward is the Chairman of the Risk Committee and the Nomination and Remuneration 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.

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  22  June  2018,  shareholders  re-elected  all  the  Directors  of  the 
Company.

20

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Corporate Governance (continued)

Composition and Independence of Directors (continued)
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 25.

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. 

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.

21

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Corporate Governance (continued)

Directors’ Meetings and Attendance
The table below shows the attendance at Board 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 & Remuneration Committee meeting, three ad hoc Board meetings and one extraordinary general meeting (“EGM”) 
held during the year ended 31 December 2018.

Name

Audit
Committee

Risk
Committee

Board

Management
Engagement
Committee

Nomination & 
Remuneration 
Committee

EGM

Number of meetings held

Claudio Albanese (Chairman of the Board 
and Management Engagement Committee)

Jon Bridel (Audit Committee Chairman)

Nigel Ward (Risk Committee Chairman  
and Nomination & Remuneration 
Committee Chairman)

7

4

7

7

4

4

4

4

4

4

4

4

1

1

1

1

1

1

1

1

1

-

1

-

Board Committees
Audit Committee
The Audit Committee comprises Jon Bridel and Nigel Ward, and meets at least three times a year. Jon Bridel is Chairman of the 
Audit Committee. Claudio Albanese was a member of the Audit Committee until he resigned from the committee on 27 November 
2018.  Mr  Albanese  resignation  was  to  align  the  Company  with  the  new  2018  UK  Corporate  Governance  Code  guidance  on 
this matter and, although this is not a requirement in the 2019 AIC Code, the Audit Committee deemed it best practice for the 
Chairman of the Board to step down from his responsibilities as a member 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 26.

Risk Committee
The Risk Committee meets at least four times a year. It comprises Nigel Ward, Jon Bridel and Claudio Albanese 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 2018.  
In January 2017, the Company was authorised to market in Sweden, Finland and Luxembourg.

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. 

Nomination and Remuneration Committee
The Nomination and Remuneration Committee meets at least once a year. It comprises the entire Board and is chaired by Nigel 
Ward. 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.

22

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Corporate Governance (continued)

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.

Criminal Finances Act
The Board of the Company has a zero tolerance commitment to preventing persons associated with it from engaging in criminal 
facilitation of tax evasion. The Board has satisﬁed itself in relation to its key service providers that they have reasonable provisions 
in place to prevent the criminal facilitation of tax evasion by their own associated persons and will not work with service providers 
who do not demonstrate the same zero tolerance commitment to preventing persons associated with it from engaging in criminal 
facilitation of tax evasion.

UK Modern Slavery Act
The Board acknowledges the requirement to provide information about human rights in accordance with the recently enacted UK 
Modern Slavery Act. The Board conducts the business of the Company ethically and with integrity, and has a zero tolerance policy 
towards modern slavery in all its forms. As the Company has no employees, all its Directors are non-executive and all its functions 
are outsourced, there are no further disclosures to be made in respect of employees and human rights.

23

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Statement of Directors’ Responsibilities

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; 

•  assess  the  Company’s  ability  to  continue  as  a  going 
concern, disclosing, as applicable, matters related to going 
concern; and 

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.

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, who are listed on page 13, conﬁrms to 
the best of their knowledge and belief:

•  the  Financial  Statements,  prepared  in  accordance  with 
IFRS  as  issued  by  the  IASB,  give  a  true  and  fair  view  of 
the  assets,  liabilities,  ﬁnancial  position  and  proﬁt  of  the 
Company, as required by DTR 4.1.12R; 

•  the  Management  Report  (comprising  the  Chairman’s 
Statement, the Investment Adviser’s Report, the Directors’ 
Report and other Committee Reports) includes a fair review 
of the development and performance of the business during 
the year, and the position of the Company at the end of the 
year, together with a description of the principal risks and 
uncertainties that the Company faces, as required by DTR 
4.1.8R and DTR 4.1.9R; and

•  use the going concern basis of accounting unless they either 
intend to liquidate the Company or to cease operations, or 
have no realistic alternative but to do so. 

•  the  Annual  Report,  comprising  the  Financial  Statements 
and  the  Management  Report,  taken  as  a  whole,  is  fair, 
balanced and understandable.

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.

Signed on behalf of the Board by:

Jon Bridel
Director

10 April 2019

24

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Directors’ Remuneration Report

The Company’s policy in regard to Directors’ remuneration is to ensure that remuneration is competitive, aligned with shareholder 
interests, relatively simple and transparent, and compatible with the aim of attracting, recruiting and retaining suitably qualiﬁed and 
experienced directors.

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: 

Claudio Albanese (Chairman and Management 
Engagement Committee Chairman)
Jon Bridel (Audit Committee Chairman)
Nigel Ward (Risk Committee Chairman and the 
Nomination & Remuneration Committee Chairman)

Total

For the year from 
1 January 2018
to 31 December 2018
Actual
£

For the year from 
1 January 2017
to 31 December 2017
Actual
£

43,000

43,000

43,000

129,000

41,500

41,500

41,500

124,500

Per Annum
£

43,000

43,000

43,000

129,000

Each Director is entitled to a fee of £43,000 per annum. The fee was increased with effect from 1 April 2017.

The remuneration policy set out above is the one applied for the years ended 31 December 2018 and 31 December 2017 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.  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 22 June 2018, 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 2018 and 31 December 2017, 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 10 April 2019 by:

Jon Bridel
Director

25

FAIR OAKS INCOME 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 the other member, Nigel Ward, are both 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 13 of these Financial Statements. The Audit Committee’s intention is to meet at least three times a year in any full year and 
meets the Auditor during those meetings. 

Duties
The Audit Committee’s main role and responsibilities are 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 Signiﬁcant Risk
The  Audit  Committee  has  an  active  involvement  and  oversight  in  the  preparation  of  both  the  Interim  Report  and  Unaudited 
Condensed Financial Statements and the Annual Report and Audited 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. After discussion 
with the Investment Adviser and KPMG Channel Islands Limited (“KPMG”), the Audit Committee determined that the key risk of 
material misstatement of the Company’s Financial Statements related to the valuation of investments. 

•  Valuation  of  the  Master  Fund  –  The  Company’s  investment  in  the  Master  Fund  had  a  fair  value  of  US$18,157,101  as  at  
31 December 2018. 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 2018 were audited by KPMG who 
issued an unmodiﬁed audit opinion dated 10 April 2019. 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 2018 to be reasonable.

•  Valuation  of  Master  Fund  II  –  The  Company’s  investment  in  the  Master  Fund  II  had  a  fair  value  of  US$367,005,255  as  at  
31 December 2018 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 II for the year ended 31 December 2018 
were  audited  by  KPMG  who  issued  an  unmodiﬁed  audit  opinion  dated  10  April  2019.  The  Audit  Committee  has  reviewed 
the Financial Statements of the Master Fund II and the accounting policies and determined the Company’s fair value of the 
investment in the Master Fund II as at 31 December 2018 to be reasonable.

26

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Report of the Audit Committee (continued)

Financial Reporting and Audit
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 the Financial Statements as a whole and was satisﬁed that 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.

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 in 2014. During the year, the Audit Committee received and 
reviewed the audit plan and strategy 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 Auditor’s assessment of its objectivity and independence as auditor of the Company;
•  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 2018, KPMG provided audit related services only as listed on page 28. 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 if it is satisﬁed that relevant safeguards are in place to protect the Auditors’ objectivity and 
independence. KPMG did provide non-audit services for the year ended 31 December 2017, KPMG conﬁrmed that this had not 
impacted their independence and outlined the reasons for this. These non-audit services complied with the Financial Reporting 
Council (“FRC”) Revised Ethical Standard 2016. The Audit Committee was satisﬁed that these non-audit services had no bearing 
on the independence of the Auditor in the prior year. 

In addition, KPMG directors are subject to periodic rotation of assignments on audit clients under applicable laws, regulations and 
independence rules. Their rotation policies comply with the FRC Revised Ethical Standard 2016 which states that the engagement 
director should be rotated after serving in this capacity for the relevant period no longer than ﬁve years. This rotation policy is 
continually monitored and it has been noted that Dermot Dempsey is serving in his ﬁnal year as engagement director for these 
Financial  Statements.  Steve  Stormonth  has  been  identiﬁed  as  successor  to  Dermot  Dempsey  as  audit  engagement  director.  
The Audit Committee considered this proposal and were satisﬁed with this recommendation. 

27

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Report of the Audit Committee (continued)

External Auditor (continued)
The following table summarises the remuneration payable to KPMG and to other KPMG International member ﬁrms for audit and 
non-audit services during the year ended 31 December 2018 and 31 December 2017, translated into the presentation currency 
at the exchange rate prevailing at 31 December 2018 and 31 December 2017 respectively.

KPMG Channel Islands Limited
– Annual Audit of the Company and related entities
– Interim review

Other KPMG International member ﬁrms
– Reporting accountant services
– Transaction related services - conversion of C shares
– Tax compliance services

For the year ended 
31 December 2018
US$

For the year ended 
31 December 2017
US$

186,106
45,978

–
–
–

213,575
52,955

142,071
11,348
2,268

Internal Controls
As the Company’s investment objective is to invest all of its assets into the Master Fund and Master Fund II, 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 investments in the Master Fund and Master Fund II, but is also mindful of the risk of the override of controls by 
its two main service providers: the Investment Adviser and the Administrator.

The Investment Adviser and the 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
10 April 2019

28

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

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

Our opinion is unmodiﬁed

We have audited the ﬁnancial statements of Fair Oaks Income Limited (the “Company”) which comprise the statement of ﬁnancial 
position as at 31 December 2018 and the statements of comprehensive income, changes in shareholders’ equity and cash ﬂows 
for the year then ended, and notes, comprising signiﬁcant accounting policies and other explanatory information.

In our opinion, the accompanying ﬁnancial statements:
–  give a true and fair view of the ﬁnancial position of the Company as at 31 December 2018, and of the Company’s ﬁnancial 

performance and cash ﬂows for the year then ended; 

–  are prepared in accordance with International Financial Reporting Standards (“IFRS”); and
–  comply with the Companies (Guernsey) Law, 2008.

Basis for Opinion

We  conducted  our  audit  in  accordance  with  International  Standards  on  Auditing  (UK)  (ISAs  (UK))  and  applicable  law.  Our 
responsibilities are described below. We have fulﬁlled our ethical responsibilities under, and are independent of the Company in 
accordance with, UK ethical requirements including FRC Ethical Standards as applied to listed entities. We believe that the audit 
evidence we have obtained is a sufﬁcient and appropriate basis for our opinion.

Key Audit Matters: our assessment of the risks of material misstatement

Key  audit  matters  are  those  matters  that,  in  our  professional  judgment,  were  of  most  signiﬁcance  in  the  audit  of  the  ﬁnancial 
statements and include the most signiﬁcant assessed risks of material misstatement (whether or not due to fraud) identiﬁed by us, 
including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the 
efforts of the engagement team. These matters were addressed in the context of our audit of the ﬁnancial statements as a whole, 
and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In arriving at our audit opinion 
above, the key audit matter (unchanged from 2017):

Financial assets at fair value through proﬁt or loss (“Investments”)

US$385.2 million (31 December 2017: US$382.3 million) 

Refer to pages 26 to 28 (Report of the Audit Committee), note 2 (Signiﬁcant Accounting Policies), note 3 (Use of Judgements 
and Estimates) and note 6 (Financial Assets at Fair Value Through Proﬁt or Loss)

29

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

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

Key Audit Matters: our assessment of the risks of material misstatement (continued)

The risk

Our response

Valuation of investments:

Our audit procedures included:

Basis:

Control evaluation:

in 

investments 

two 
The  Company’s 
underlying limited partnerships (the “Master 
Funds”) are designated at fair value through 
proﬁt  and  loss  and  represent  a  signiﬁcant 
proportion of the Company’s net assets.

The fair value of those Master Funds reﬂects 
the  Company’s  proportionate  share  of  the 
Master Funds’ net asset values. The Master 
Funds’  net  asset  values  incorporate  the 
fair value of their own investment portfolios 
which  comprise;  Mezzanine  &  Equity 
(“CLO”) 
Collateralized  Loan  Obligation 
positions; a Warehoused pre-CLO position; 
and  a  proportionate  share  of  a  third  party 
CLO  fund’s  net  asset  value.  The  fair  value 
of the CLOs are determined using indicative 
prices  (“Price  Quotes”)  obtained  by  the 
Master  Funds  from  their  independent  third 
party  valuation  provider 
(the  “Valuation 
Agent”). 

Risk:
The  valuation  of  the  Company’s  ﬁnancial 
assets designated at fair value through proﬁt 
and  loss  is  considered  a  signiﬁcant  area  of 
our audit, given that it represents the majority 
of the net assets of the Company. Inherent 
in  that  valuation  is  the  use  of  signiﬁcant 
estimates and judgments in determining the 
fair  value  of  the  Master  Funds’  underlying 
CLOs.

30

We assessed the design and implementation of the control over the valuation of 
the Company’s investments in the Master Funds.

Evaluation of the Valuation Agent:

Assessed, with the assistance of our KPMG valuation specialist, the objectivity, 
capabilities  and  competence  of  the  Valuation  Agent  engaged  by  the  Master 
Funds  to  provide  Price  Quotes.  Assessed  the  methodology  applied  by  the 
Valuation  Agent  in  developing  fair  value  Price  Quotes.  Independently  obtained 
the Valuation Agent’s report and agreed the Price Quotes provided to those used 
in the valuation of the Master Funds’ CLOs. 

Valuation procedures including use of a KPMG valuation specialist: 

Assessed whether the net asset values of the Master Funds were representative 
of their fair value. Recalculated the Company’s proportion of the net asset values 
of the Master Funds. 

For 100% of the Mezzanine CLO positions held by the Master Funds, with the 
support  of  our  KPMG  valuation  specialist,  independently  determined  reference 
prices by applying a mark to model valuation technique which utilises inputs such 
as  the  current  weighted  average  life  of  the  instrument  and  market  observable 
discount rates.

For  a  risk  based  selection  of  Equity  CLO  positions  held  by  the  Master  Funds, 
with  the  support  of  our  KPMG  valuation  specialist,  independently  determined 
reference  prices  through  the  use  of  fundamental  cash  ﬂow  modelling  sourcing 
key inputs and assumptions used, such as default rates, prepayment rates and 
recovery rates, to observable market data.

For  the  sole  Warehoused  pre-CLO  position  held  by  one  of  the  Master  Funds 
we utilised, with the support of our KPMG valuation specialist, a Black Scholes 
option pricing model to assess the probability of this position converting into a 
CLO and assessed the outcome against that Master Fund’s reference price.

For  the  investment  into  the  third  party  CLO  fund,  we  agreed  the  fair  value  to 
a  net  asset  value  statement  received  from  that  fund’s  administrator.  We  also 
obtained the coterminous audited ﬁnancial statements and agreed the audited 
net asset value to the net asset value statement. In order to assess whether the 
fair  value  required  adjustment,  we  considered  the  basis  of  preparation, 
together  with  accounting  policies  applied  and  whether  the  audit  opinion  was 
unmodified.

Assessing disclosures:

We  also  considered  the  Company’s  disclosures  (Note  3)  in  relation  to  the  use 
of  estimates, the Company’s valuation of investments policies (Note 2) and fair 
value of financial instruments (Note 6) for compliance with IFRS.

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

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

Our application of materiality and an overview of the scope of our audit
Materiality for the ﬁnancial statements as a whole was set at US$12,000,000 determined with reference to a benchmark of Net 
Assets of US$415,619,049 of which it represents approximately 3% (31 December 2017: 3%).

We reported to the Audit Committee any corrected or uncorrected identiﬁed misstatements exceeding US$600,000 in addition to 
other identiﬁed misstatements that warranted reporting on qualitative grounds.

Our  audit  of  the  Company  was  undertaken  to  the  materiality  level  speciﬁed  above,  which  has  informed  our  identiﬁcation  of 
signiﬁcant risks of material misstatement and the associated audit procedures performed in those areas as detailed above. 

We have nothing to report on going concern
We are required to report to you if we have concluded that the use of the going concern basis of accounting is inappropriate or 
there is an undisclosed material uncertainty that may cast signiﬁcant doubt over the use of that basis for a period of at least twelve 
months from the date of approval of the ﬁnancial statements. We have nothing to report in these respects.

We have nothing to report on the other information in the Annual Report
The  directors  are  responsible  for  the  other  information  presented  in  the  Annual  Report  together  with  the  ﬁnancial  statements.  
Our opinion on the ﬁnancial statements does not cover the other information and we do not express an audit opinion or any form 
of assurance conclusion thereon. 

Our responsibility is to read the other information and, in doing so, consider whether, based on our ﬁnancial statements audit work, 
the information therein is materially misstated or inconsistent with the ﬁnancial statements or our audit knowledge. Based solely 
on that work we have not identiﬁed material misstatements in the other information. 

We have nothing to report on other 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.

Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 24, the Directors are responsible for: the preparation of the ﬁnancial 
statements including being satisﬁed that they give a true and fair view; such internal control as they determine is necessary to 
enable the preparation of ﬁnancial statements that are free from material misstatement, whether due to fraud or error; assessing 
the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the 
going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic 
alternative but to do so. 

Auditor’s responsibilities
Our  objectives  are  to  obtain  reasonable  assurance  about  whether  the  ﬁnancial  statements  as  a  whole  are  free  from  material 
misstatement,  whether  due  to  fraud  or  error,  and  to  issue  our  opinion  in  an  auditor’s  report.  Reasonable  assurance  is  a  high 
level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material 
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, 
they could reasonably be expected to inﬂuence the economic decisions of users taken on the basis of the ﬁnancial statements. 

A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities. 

31

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

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

The purpose of this report and restrictions on its use by persons other than the Company’s members as a body(cid:1)
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.

Dermot Dempsey
For and on behalf of KPMG Channel Islands Limited
Chartered Accountants and Recognised Auditors

Glategny Court
St Peter Port
Guernsey GY1 1WR
Channel Islands 

10 April 2019

32

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Statement of Comprehensive Income

For the year ended 31 December 2018

1 January 2018
to 31 December 2018

1 January 2017
to 31 December 2017

Note

US$

US$

Revenue

Net gains on ﬁnancial assets at fair value  
through proﬁt or loss

Interest income

Net foreign exchange gains

Total revenue

Expenses

Investment advisory fees

Audit and interim review fees

Administration fees

Directors’ fees and expenses

Legal and professional fees

Other expenses

Share re-designation costs

Total operating expenses

Proﬁt and total comprehensive income for the year

Basic and diluted earnings per 2017 share

Basic and diluted earnings per 2014 share

6

7

8

8

8

10

11

11

4,909,405

203,850

170,957

5,284,212

208,105

94,999

149,798

179,535

37,060

385,049

–

50,660,996

41,105

235,235

50,937,336

210,786

171,244

123,776

206,164

353,321

576,057

877,172

1,054,546

2,518,520

4,229,666

48,418,816

0.0052

0.0488

0.1330

0.1435

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

The accompanying notes on pages 37 to 66 form an integral part of the Financial Statements.

33

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Statement of Changes in Shareholders’ Equity

For the year ended 31 December 2018

Share 
capital 
(2017 
Shares)
US$

Share 
capital 
(2014 
Shares)
US$

Retained 
earnings 
(2017 
Shares)
US$

Retained 
earnings 
(2014 
Shares)
US$

Note

Total 
equity
US$

At 1 January 2018

406,185,791

44,713,419

12,761,639

2,289,632

465,950,481

Issue of 2017 Shares during the year,  
net of issue costs

33,627,207

Issue of 2017 Shares for scrip dividend

10

75,275

Proﬁt and total comprehensive  
income for the year

Dividends declared during the year

4

Share redemptions paid during the year

10

–

–

–

–

–

–

–

–

–

–

–

33,627,207

75,275

2,306,790

1,922,876

4,229,666

(58,645,907)

(7,620,688)

(66,266,595)

(21,996,985)

–

–

(21,996,985)

At 31 December 2018

439,888,273

22,716,434

(43,577,478)

(3,408,180) 415,619,049

Share 
capital 
(2017 
Shares)
US$

Share 
capital 
(2014 
Shares)
US$

Retained 
earnings 
(2017 
Shares)
US$

Retained 
earnings 
(2014 
Shares)
US$

Note

Total 
equity
US$

At 1 January 2017

–

299,112,959

Issue of 2017 Shares during the year,  
net of issue costs

84,707,871

Conversion of C Shares to 2017 Shares 
during the year, net of issue costs

10

67,989,374

–

–

10

253,488,546

(253,488,546)

–

–

–

–

12,570,936

311,683,895

–

–

–

84,707,871

67,989,374

–

Conversion of ordinary shares into 2017 
Shares during the year, net of issue costs

Proﬁt and total comprehensive  
income for the year

Transfer brought forward retained earnings 
from 2014 Shares to 2017 Shares

Dividends declared during the year

4

Share redemptions paid during the year

10

–

–

–

–

–

–

–

41,670,885

6,747,931

48,418,816

10,653,868

(10,653,868)

–

(39,563,114)

(6,375,367)

(45,938,481)

(910,994)

–

–

(910,994)

At 31 December 2017

406,185,791

44,713,419

12,761,639

2,289,632

465,950,481

The accompanying notes on pages 37 to 66 form an integral part of the Financial Statements.

34

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Statement of Financial Position

At 31 December 2018

31 December 2018

31 December 2017

Note

US$

US$

Assets

Cash and cash equivalents

Prepayments

Distributions receivable

Financial assets at fair value through proﬁt or loss

6

Total assets

Liabilities

Trade and other payables

Total liabilities

Net assets

Equity

Retained earnings

Share capital

Total equity

Total Net Assets attributable to 2017 Shareholders

Number of 2017 Shares

Net asset value per 2017 Share

Total Net Assets attributable to 2014 Shareholders

Number of 2014 Shares

Net asset value per 2014 Share

12

10

10

10

16,552,741

37,303

13,915,728

385,162,356

415,668,128

49,079

49,079

54,580,314

125,921

28,980,964

382,307,248

465,994,447

43,966

43,966

415,619,049

465,950,481

(46,985,658)

462,604,707

415,619,049

396,310,795

453,348,737

0.8742

19,308,254

21,942,137

0.8800

15,051,271

450,899,210

465,950,481

418,947,430

418,274,938

1.0016

47,003,051

46,501,283

1.0108

The Financial Statements on pages 33 to 66 were approved and authorised for issue by the Board of Directors on 10 April 2019 
and signed on its behalf by:

Jon Bridel
Director

The accompanying notes on pages 37 to 66 form an integral part of the Financial Statements.

35

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Statement of Cash Flows

For the year ended 31 December 2018

Cash ﬂows from operating activities

Proﬁt for the year

Adjustments to reconcile proﬁt to net cash ﬂows:

Net gains on ﬁnancial assets at fair value  
through proﬁt or loss

Net foreign exchange gains

Decrease/(increase) in prepayments

Increase/(decrease) in trade and other payables

Income distributions received from Master Fund

Income distributions received from Master Fund II

Capital distributions received from Master Fund

Purchases into Master Fund II during the year

Net cash ﬂow from/(used in) operating activities

Cash ﬂows from investing activities

Purchase of US Treasury Bills during the year

Proceeds from sale of US Treasury Bills during the year

Net cash ﬂow from investing activities

Cash ﬂows from ﬁnancing activities

Proceeds from 2017 share issuance, net of costs

Proceeds from C share issuance, net of costs

Dividends paid during the year

2014 Share redemptions paid during the year

Net cash ﬂow (used in)/from ﬁnancing activities

1 January 2018
to 31 December 2018

1 January 2017
to 31 December 2017

Note

US$

US$

4,229,666

48,418,816

6

6

6

10

10

4

10

(4,909,405)

(170,957)

(850,696)

88,618

5,113

7,211,405

62,688,724

17,419,404

(70,200,000)

16,362,568

–

–

–

33,627,207

–

(66,191,320)

(21,996,985)

(54,561,098)

(50,660,996)

(235,235)

(2,477,415)

(48,864)

(59,349)

14,337,385

22,327,040

5,401,064

(103,214,011)

(63,734,150)

(49,969,000)

50,000,000

31,000

84,707,871

67,989,374

(45,938,481)

(910,994)

105,847,770

Net increase in cash and cash equivalents

(38,198,530)

42,144,620

Cash and cash equivalents at beginning of year

54,580,314

12,200,459

Effect of foreign exchange rate changes during the year

170,957

235,235

Cash and cash equivalents at end of year

16,552,741

54,580,314

The accompanying notes on pages 37 to 66 form an integral part of the Financial Statements.

36

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements

For the year ended 31 December 2018

1.  GENERAL INFORMATION

Fair Oaks Income Limited (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 (“SFS”) (previously Specialist 
Fund Market) of the London Stock Exchange (“LSE”) on 12 June 2014. 

The Company makes its investments through FOIF LP (the “Master Fund”) and FOMC II LP (the “Master Fund II”) (the “Master 
Fund” and the “Master Fund II” together the “Master Funds”), in which the Company is a limited partner. The Master Fund 
was registered in Guernsey on 7 May 2014 and the Master Fund II was registered in Guernsey on 24 February 2017 under 
The Limited Partnerships (Guernsey) Law, 1995, as amended. The only other limited partner in the Master Fund II is Fair Oaks 
Founder II LP, a related entity. 

At 31 December 2018, the Company had 21,942,137 2014 Shares (“2014 Shares”) and 453,348,737 2017 Shares (“2017 
Shares”).The 2014 Shares invest solely into the Master Fund and the 2017 Shares invest solely into Master Fund II. At 31 
December 2018, the Company had direct holdings of 11.31% (31 December 2017: 11.31%) holding in the Master Fund 
and  100%  (31  December  2017:  100%)  holding  in  Master  Fund  II,  which  in  turn  had  a  holding  of  62.82%  in  the  Master 
Fund (31 December 2017: 62.82%). The general partner of the Master Fund and Master Fund II 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”) and the Master Fund II invests in a portfolio which consists primarily of the investment in the Master Fund.  
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  contain  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  not  permitted  to  prepare  individual 
Financial Statements under IFRS.

Going Concern
The Board has assessed the Company’s ﬁnancial position as at 31 December 2018 and the factors that may impact its 
performance in the forthcoming year and is of the opinion that it is appropriate to prepare these Financial Statements on a 
going concern basis as the Company has adequate ﬁnancial resources to meet its liabilities as they fall due.

37

 
 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

2.  SIGNIFICANT ACCOUNTING POLICIES (continued)
New Accounting Standards effective and adopted
• 
• 

IFRS 9, “Financial Instruments” (effective for periods commencing on or after 1 January 2018);
IFRS 15, “Revenue from Contracts with Customers” (effective for periods commencing on or after 1 January 2018).

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

• 

The adoption of IFRS 9 has had no material impact on these Financial Statements, principally for the following reasons:
• 

the classiﬁcation and measurement methodology for all of the Company’s assets and liabilities has remained the same 
under IFRS 9 as under IAS 39; 
the Company’s investments into the Master Fund and Master Fund II are measured at fair value. As explained further on 
page 39, the Company meets the criteria to be classiﬁed as an investment entity and subsequently has determined that 
it shall not consolidate its subsidiaries; instead it is required to measure its investment in these subsidiaries at fair value 
through proﬁt or loss. The business model of the Company will continue to be managed on the same basis going forward 
with the performance of the Master Funds being assessed on a fair value basis, and so the changes in IFRS 9 relating to 
the assessment of credit losses do not apply to these instruments;

•  The Company’s other receivables and payables are held solely for the collections and payments of contractual cash 
ﬂows, being payments of principal and interest where applicable. As such these assets and liabilities continue to be held 
at amortised cost under IFRS 9, the same as under IAS 39; and
the Company does not apply hedge accounting, and is therefore unaffected by the hedge accounting-related changes 
introduced in IFRS 9.

• 

The adoption of IFRS 15 has had no material impact on these Financial Statements as the Company has no income within 
the scope of IFRS 15.

Interest income
Interest  income  comprises  interest  income  from  cash  and  cash  equivalents.  Interest  income  is  recognised  on  a  time-
proportionate basis using the effective interest method.

Net Gains on Financial Assets at Fair Value through Proﬁt or Loss
Net gains 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 gainsfrom 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.

2014 Shares, 2017 Shares and C Shares
The 2014 shares, 2017 shares and C shares (when in issue) 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.

38

 
 
 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

2.  SIGNIFICANT ACCOUNTING POLICIES (continued)

Financial Instruments
Classiﬁcation
The Company classiﬁes its ﬁnancial assets and ﬁnancial liabilities into categories in accordance with IFRS 9. 

On initial recognition, the Company classiﬁes ﬁnancial assets as measured at amortised cost or at fair value through proﬁt or 
loss (“FVTPL”).

A ﬁnancial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL: 
• 
• 

it is held within a business model whose objective is to hold assets to collect contractual cash ﬂows; and 
its contractual terms give rise on speciﬁed dates to cash ﬂows that are SPPI. 

All other ﬁnancial assets of the Fund are measured at FVTPL. 

In making an assessment of the objective of the business model in which a ﬁnancial asset is held, the Company considers all 
of the relevant information about how the business is managed.

The Company has determined that it has two business models.
•  Held-to-collect  business  model:  this  includes  cash  and  cash  equivalents,  prepayments  and  distributions  receivable. 

These ﬁnancial assets are held to collect contractual cash ﬂow. 

•  Other business model: this includes investments in the master funds and derivatives. These ﬁnancial assets are managed 

and their performance is evaluated, on a fair value basis, with frequent sales taking place. 

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 IFRS 9.

Classiﬁcation of ﬁnancial assets – Policy applicable before 1 January 2018 
The Fund classiﬁed ﬁnancial assets into the following categories. 

Financial assets at FVTPL:
Investments into the Master Funds

Financial assets at amortised cost:
Loans and receivables: cash and cash equivalents, prepayments and distributions receivable.

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.

A non-derivative ﬁnancial asset with ﬁxed or determinable payments could be classiﬁed as a loan and receivable unless it was 
quoted in an active market or was an asset for which the holder may not recover substantially all of its initial investment, other 
than because of credit deterioration.

For a reconciliation of line items in the statement of ﬁnancial position to the categories of ﬁnancial instruments, as deﬁned by 
IAS 39, see Note 11.

39

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

2.  SIGNIFICANT ACCOUNTING POLICIES (continued)

Financial Instruments (continued)
Financial liabilities – Classiﬁcation, subsequent measurement and gains and losses
Financial liabilities are classiﬁed as measured at amortised cost or FVTPL. 

A ﬁnancial liability is classiﬁed as at FVTPL if it is classiﬁed as held-for-trading, it is a derivative or it is designated as such 
on initial recognition. Financial liabilities at FVTPL are measured at fair value and net gains and losses, including any interest 
expense, are recognised in proﬁt or loss. 

Other ﬁnancial liabilities are subsequently measured at amortised cost using the effective interest method. Interest expense 
and foreign exchange gains and losses are recognised in proﬁt or loss. Any gain or loss on derecognition is also recognised 
in proﬁt or loss.

Financial liabilities at FVTPL:
Held for trading: derivative ﬁnancial instruments. 

Financial liabilities at amortised cost:
This includes trade and other payables.

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 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 IFRS 9. A ﬁnancial liability is derecognised 
when the obligation speciﬁed in the contract is discharged, cancelled or expires.

Investment in the Master Fund and Master Fund II
The Board of Directors (the “Board”) has determined that the Company has all the elements of control as prescribed by IFRS 
10 in relation to the Master Fund and Master Fund II as the Company is the only limited partner, other than the Fair Oaks 
Founder II LP, in Master Fund II and indirectly (via its investment in the Master Fund II) is the main limited partner in the Master 
Fund, is exposed and has rights to the returns of the Master Fund and Master Fund II and has the ability either directly, or 
through the Investment Adviser, to affect the amount of its returns from the Master Fund and Master Fund II.

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 IFRS 9. 

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.

40

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

2.  SIGNIFICANT ACCOUNTING POLICIES (continued)

Investment in the Master Fund and Master Fund II (continued)
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  both  the  Master  Fund’s  and  Master  Fund  II’s  investments  have 
documented maturity/redemption dates or will be sold if other investments with better risk/reward proﬁle are identiﬁed, the 
Board of Directors consider that this demonstrates a clear exit strategy.

The Master Fund and Master Fund II measure and evaluate the performance of substantially all of their 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 Board of 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.

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

The Company has concluded that both the Master Fund and Master Fund II, for which the Company’s commitments are 
detailed further in Note 13, meet the deﬁnition of unconsolidated subsidiaries under IFRS 12 and have made the necessary 
disclosures in notes 5 and 6 of these Financial Statements.

Foreign Currency
Functional and presentation currency
The Board of Directors has determined that the functional currency of the Company is US Dollar. In doing so, they have 
considered the following factors: that US Dollar is the currency of the primary economic environment of the Company, the 
currency in which the original ﬁnance was raised and distributions will be made, the currency that would be returned if the 
Company was wound up, and the currency to which the majority of the underlying investments are exposed. The Financial 
Statements  of  the  Company  are  presented  in  US  Dollars,  which  has  been  selected  as  the  presentation  currency  of  the 
Company. 

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 reporting date when 
fair value was determined.

Dividends
Dividends  payable  to  the  holders  of  ordinary  shares  and  2014  and  2017  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.

41

 
 
 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

2.  SIGNIFICANT ACCOUNTING POLICIES (continued)

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  Board  of  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.

In the Board of Directors’ opinion, the Company is engaged in a single segment of business, being investments into the 
Master Fund and Master Fund II, which are Guernsey registered limited partnerships.

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  of  Directors  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 year. 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
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 investments in the Master Fund and Master Fund II at fair value. This determination involves a degree 
of judgement (see note 2).

Estimates
Fair Value
The  Company  records  its  investments  in  the  Master  Fund  and  Master  Fund  II  at  fair  value.  Fair  value  is  determined  as 
the Company’s share of the Net Asset Value (“NAV”) of the investments. This share is net of any notional carried interest 
due to Fair Oaks Founder LP (the “Founder Partner”), the Founder Partner of the Master Fund or Fair Oaks Founder II LP 
(the “Founder Partner II”), the Founder Partner II of Master Fund II. The Investment Adviser has reviewed the NAVs of the 
investments and determined that no adjustments regarding liquidity discounts were required. 

42

 
 
 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

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, Master Fund II and qualifying short term investments, less expenses of the Company. At 31 December 
2018, the Company’s retained earnings include unrealised losses of US$62,492,820 (31 December 2017: US$12,567,332) 
(see note 6), gross income from investments excludes these unrealised losses which are capital in nature.

During the year, the Company had declared eleven monthly dividends of 0.7 US cents per ordinary share. A larger twelfth 
interim dividend was declared on 10 January 2019 in respect of 2018 such that, in the opinion of the Board of Directors, 
substantially all net realised income generated by the Company in 2018 would be distributed to shareholders.

The Company declared the following dividends to ordinary shareholders during the year ended 31 December 2018:

Period to
Dividend per 2017 share:

Payment date

31 December 2017

9 February 2018

31 January 2018

2 March 2018

28 February 2018

22 March 2018

31 March 2018

30 April 2018

31 May 2018

30 June 2018

31 July 2018

26 April 2018

24 May 2018

28 June 2018

26 July 2018

23 August 2018

31 August 2018

27 September 2018

30 September 2018

25 October 2018

31 October 2018

22 November 2018

30 November 2018

28 December 2018

Dividend rate 
per share 
(cents)

Net dividend 
payable 
(US$)

Record date

Ex-dividend date

5.75

0.70

0.70

0.70

0.70

0.70

0.70

0.70

0.70

0.70

0.70

0.70

24,267,811

12 January 2018

11 January 2018

2,914,913

16 February 2018

15 February 2018

2,930,793

3,166,050

3,170,308

3,172,794

3,169,491

3,172,065

9 March 2018

8 March 2018

13 April 2018

11 May 2018

12 April 2018

10 May 2018

15 June 2018

14 June 2018

13 July 2018

12 July 2018

10 August 2018

9 August 2018

3,173,181 14 September 2018 13 September 2018

3,164,972

12 October 2018

11 October 2018

3,171,251

9 November 2018

8 November 2018

3,172,278 14 December 2018 13 December 2018

13.45

58,645,907

Dividend per 2017 Share declared after 31 December 2018:

31 December 2018

31 January 2019

3.45

15,670,072

18 January 2019

17 January 2019

43

 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

4.  DIVIDENDS (continued)

The Company declared the following dividends to ordinary shareholders during the year ended 31 December 2018, continued:

Period to
Dividend per 2014 share:

Payment date

Dividend rate 
per share 
(cents)

Net dividend 
payable 
(US$)

Record date

Ex-dividend date

31 December 2017

9 February 2018

10.02

4,659,889

12 January 2018

11 January 2018

31 January 2018

2 March 2018

28 February 2018

22 March 2018

31 March 2018

30 April 2018

31 May 2018

30 June 2018

31 July 2018

26 April 2018

24 May 2018

28 June 2018

26 July 2018

23 August 2018

31 August 2018

27 September 2018

30 September 2018

25 October 2018

31 October 2018

22 November 2018

30 November 2018

28 December 2018

0.70

0.70

0.70

0.70

0.70

0.70

0.70

0.70

0.70

0.70

0.70

325,491

16 February 2018

15 February 2018

325,512

325,479

325,497

325,497

275,335

275,346

9 March 2018

8 March 2018

13 April 2018

11 May 2018

12 April 2018

10 May 2018

15 June 2018

14 June 2018

13 July 2018

12 July 2018

10 August 2018

9 August 2018

275,343 14 September 2018 13 September 2018

176,845

12 October 2018

11 October 2018

176,861

9 November 2018

8 November 2018

153,593 14 December 2018 13 December 2018

17.72

7,620,688

Dividend per 2014 Share declared after 31 December 2018:

31 December 2018

31 January 2019

4.26

934,793

18 January 2019

17 January 2019

The Company declared the following dividends to ordinary shareholders during the year ended 31 December 2017:

Period to
31 December 2016

Payment date
2 February 2017

31 January 2017

28 February 2017

28 February 2017

30 March 2017

31 March 2017

30 April 2017

31 May 2017

30 June 2017

31 July 2017

28 April 2017

18 May 2017

22 June 2017

20 July 2017

17 August 2017

31 August 2017

21 September 2017

30 September 2017

19 October 2017

31 October 2017

23 November 2017

30 November 2017

21 December 2017

Dividend rate 
per 2014 and 
2017 share 
(cents)
5.75

Net dividend 
payable 
(US$)
18,055,284

Record date
13 January 2017

Ex-dividend date
12 January 2017

0.70

0.70

0.70

0.70

0.70

0.70

0.70

0.70

0.70

0.70

0.70

2,181,443

17 February 2017

16 February 2017

2,181,746

2,181,659

2,174,061

2,180,335

2,676,456

2,649,591

17 March 2017

16 March 2017

18 April 2017

13 April 2017

5 May 2017

9 June 2017

7 July 2017

4 May 2017

8 June 2017

6 July 2017

4 August 2017

3 August 2017

2,673,119

8 September 2017

7 September 2017

2,857,087

6 October 2017

5 October 2017

2,856,879 10 November 2017

9 November 2017

3,270,821

8 December 2017

7 December 2017

13.45

45,938,481

The  default  currency  payment  for  dividends  is  US  Dollars.  However,  with  effect  from  29  June  2016,  shareholders  could 
elect to receive their dividends in British Pounds Sterling (“Sterling”) by registering under the Company’s Dividend Currency 
Election.

44

 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

4.  DIVIDENDS (continued)

The rate per ordinary share to be used to pay shareholders who elect to receive their dividend in Sterling is 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 2018 were US$Nil (31 December 2017: US$Nil).

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 investments in the Master Fund and 
Master Fund II 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 Master Fund II 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 investments. The Company’s strategy for the management of market risk mirrors the strategy 
of  the  Master  Fund  and  Master  Fund  II,  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 or Master Fund II’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 Master Fund II and on a 
look-through basis to the underlying assets in the CLOs.

Interest receivable by the Company 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.

A majority of the Company’s ﬁnancial assets comprise investments into the Master Fund and Master Fund II, which invest 
in income notes: Equity Subordinated and Mezzanine tranches of cash ﬂow CLOs. The Master Fund’s and Master Fund II’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.

45

 
 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

5.  FINANCIAL RISK MANAGEMENT (continued)

Market Risk (continued)
Interest Rate Risk (continued)
The following table shows the portfolio proﬁle of the Master Fund and Master Fund II at 31 December 2018 and 31 December 
2017:

Investments with exposure  
to a ﬂoating interest rate

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

31 December 2018

31 December 2017

Master Fund*
US$

Master Fund II
US$

Master Fund*
US$

Master Fund II
US$

20,544,242

370,132,597

42,157,559

339,639,224

20,544,242

370,132,597

42,157,559

339,639,224

*Shows the Company’s proportionate direct share in the Master Fund at 11.31% through 2014 Shares investment only.

The following table shows the Board of Directors’ best estimate of the Company’s share of the sensitivity of the portfolio of 
the Master Fund and Master Fund II 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 2018 
effect on net assets 
and proﬁt or loss 
US$ 
(1,703,394) 
1,720,476 

Possible 
reasonable 
change in rate 
-1% 
1% 

31 December 2017
effect on net assets
and proﬁt or loss
US$
(4,749,693)
3,004,201

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 and Master Fund II. Both 
the Master Fund’s and Master Fund II’s portfolios are predominantly denominated in US Dollar. However, both the Master 
Fund and Master Fund II 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 and Master Fund II. 

46

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

5.  FINANCIAL RISK MANAGEMENT (continued)

Market Risk (continued)
Currency risk (continued)
The Company’s share of the Master Fund and Master Fund II’s total net foreign currency exposure at the year end was as 
follows:-

EUR Exposure

Financial assets at fair value  
through proﬁt and loss

Derivatives at fair value  
through proﬁt or loss

Other receivables

Trade and other payables

Net EUR Exposure

GBP Exposure

Cash and cash equivalents

Other receivables

Trade and other payables

Net GBP Exposure

31 December 2018

31 December 2017

Master Fund*
US$

Master Fund II
US$

Master Fund*
US$

Master Fund II
US$

443,041

28,668,405

554,729

(469,351)

(28,818,600)

(556,778)

–

(5,216)

(31,526)

–

(87,496)

(237,691)

–

–

(2,049)

–

–

–

–

–

31 December 2018

31 December 2017

Master Fund*
US$

Master Fund II
US$

Master Fund*
US$

Master Fund II
US$

–

564

–

564

–

–

(4,886)

(4,886)

135

1,012

(11,326)

(10,179)

–

–

(16,381)

(16,381)

Net Exposure

(30,962)

(242,577)

(12,228)

(16,381)

*Shows the Company’s proportionate direct share in the Master Fund at 11.31% through 2014 Shares investment only.

EUR/US Dollar 
GBP/US Dollar 

EUR/US Dollar 
GBP/US Dollar 

Possible change 
in exchange rate 

+/- 10% 
+/- 15% 

31 December 2018 
net exposure 
US$ 
(269,217) 
(4,322) 

Possible change 
in exchange rate 

+/- 15% 
+/- 10% 

31 December 2017 
net exposure 
US$ 
(2,049) 
(26,560) 

31 December 2018
effect on net assets
and proﬁt or loss
US$
(-/+) 26,922
(-/+) 648

31 December 2017
effect on net assets
and proﬁt or loss
US$
(-/+) 307
(-/+) 2,656

The sensitivity rate of 10% (31 December 2017: 15%) is regarded as reasonable due to the actual volatility over the last year 
of US Dollar against Euro.

The sensitivity rate of 15% (31 December 2017: 10%) is regarded as reasonable due to the actual volatility over the last year 
of US Dollar against Sterling.

47

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

5.  FINANCIAL RISK MANAGEMENT (continued)

Market Risk (continued)
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 Board of Directors does 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 10% (31 December 2017: 1%), 
the impact on the NAV of the Company would be +/- US$1,815,710 (31 December 2017: US$375,494). 

If  the  value  of  the  Company’s  investment  in  the  Master  Fund  II  were  to  increase  or  decrease  by  10%  (31  December 
2017:  1%),  the  impact  on  the  NAV  of  the  Company  would  be  +/-  US$36,700,525  (31  December  2017:  US$3,447,578).  
At 31 December 2018, the sensitivity rate of 10% (31 December 2017: 1%) is regarded as reasonable due to the actual 
market price volatility experienced on the Master Funds’ CLO investments during the year. 

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, Master Fund II or a vehicle in which the Master Fund or Master Fund 
II 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 and Master Fund II, 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

Distributions receivable

Financial assets at fair value through proﬁt or loss

31 December 2018
US$

31 December 2017
US$

16,552,741

13,915,728

385,162,356

415,630,825

54,580,314

28,980,964

382,307,248

465,868,526

At 31 December 2018, there were no ﬁnancial assets past due or impaired.

At 31 December 2018, the cash and cash equivalents and other assets of the Company, excluding its investments into the 
Master Fund and Master Fund II, and substantially all of the assets of the Master Fund and Master Fund II are held by BNP 
Paribas Securities Services S.C.A. (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 2018 was Aa3 as 
rated by Moody’s (31 December 2017: Aa3) and A by Standard & Poor’s (31 December 2017: A).

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  manage  this  risk  by  providing  diversiﬁcation  in  terms  of  underlying  assets,  issuer 
section, geography and maturity proﬁle. The Master Funds’ concentration of credit risk by industry for the CLO investments, 
on a look-through basis, as at 31 December 2018 and 31 December 2017 are summarised in the table below. The Company’s 
credit risk is monitored on a quarterly basis by the Board of Directors. 

48

 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

5.  FINANCIAL RISK MANAGEMENT (continued)
Credit and Counterparty Risk (continued)
The Master Funds’ have diversiﬁed their exposure to industry sectors. The top 10 are as follows:

31 December 2018

31 December 2017

Master Fund
%

Master Fund II*
%

Master Fund
%

Master Fund II
%

Industry

Business equipment and services

12.8

Healthcare

Electronics and electrical

Telecommunications

Financial intermediaries

Lodging and casinos

Chemical and plastics

Utilities

Broadcast radio and television

Building and development

Retailers (except food and drug)

9.5

6.0

5.4

5.4

4.8

4.7

4.5

4.0

3.6

–

17.2

11.6

3.8

6.2

5.0

5.4

4.0

3.5

5.9

4.2

–

11.5

13.4

8.2

6.2

5.4

4.8

4.6

4.8

4.6

3.8

–

3.8

9.6

4.9

5.9

4.1

5.2

3.9

3.9

3.9

–

4.0

60.7

66.8

57.7

58.8

*The Master Fund II’s exposure in the underlying CLO investments includes its exposure through its investment in the Master Fund.

Source: CLO trustee reports. Based on the Master Funds’ exposure and weighted by CLO size and Master Funds’ ownership percentage

The Master Funds’ 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 2018 and 31 December 2017 is summarised below. Master Fund 
II’s exposure to credit risk, also summarised below, relates to its directly held CLO investments and its investments into the 
Master  Fund  and  Cycad  based  on  the  country  of  registration  of  the  CLO  investments  and  the  Limited  Partnerships  (not 
necessarily asset class exposure) as at 31 December 2018 and 31 December 2017. 

31 December 2018

31 December 2017

Master Fund*
US$

Master Fund II
US$

Master Fund*
US$

Master Fund II
US$

United States of America

20,101,201

240,617,993

41,602,830

131,080,550

Europe

Guernsey

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

443,041

28,668,405

554,729

–

–

100,846,199

–

208,558,674

20,544,242

370,132,597

42,157,559

339,639,224

*Shows the Company’s proportionate direct share in the Master Fund at 11.31% through 2014 Shares investment only. 

49

 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

5.  FINANCIAL RISK MANAGEMENT (continued)
Credit and Counterparty Risk (continued)
The geographical breakdown of the underlying CLO investments is as follows:

United States of America

Canada

Luxembourg

United Kingdom

Netherlands

Other

Total

31 December 2018

31 December 2017

Master Fund
%

Master Fund II*
%

Master Fund
%

Master Fund II*
%

90.6

2.2

1.8

1.2

1.2

3.0

90.9

2.2

1.7

1.5

1.7

2.0

90.7

2.2

2.3

1.2

0.8

2.8

90.0

2.3

2.0

1.1

0.9

3.7

100.0

100.0

100.0

100.0

*The Master Fund II’s exposure in the underlying CLO investments includes its exposure through its investment in the Master Fund.

The table below summarises the Master Fund’s and Master Fund II’s underlying portfolio concentrations as of 31 December 
2018 and 31 December 2017:

31 December 2018

Master Fund

Master Fund II*

31 December 2017

Master Fund

Master Fund II*

Maximum portfolio 
holdings of a single 
asset % of total 
portfolio

Average portfolio 
holdings % of 
total portfolio

12.11%

8.22%

9.07%

8.73%

5.88%

3.33%

2.56%

2.22%

*The Master Fund II’s exposure in the underlying CLO investments includes its exposure through its investment in the Master Fund.

The tables below summarises the Master Fund’s and Master Fund II’s portfolio by asset class and portfolio ratings as at 31 
December 2018 and 31 December 2017:

By asset class

31 December 2018

31 December 2017

Master Fund*
US$

Master Fund II
US$

Master Fund*
US$

Master Fund II
US$

Equity Subordinated CLO notes

18,760,293

250,257,485

1,783,949

5,136,632

25,119,396

17,038,163

115,190,150

–

–

114,738,480

–

224,449,074

20,544,242

370,132,597

42,157,559

339,639,224

Mezzanine CLO notes

Limited Partnerships

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

*Shows the Company’s proportionate direct share in the Master Fund at 11.31% through 2014 Shares investment only.

50

 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

5.  FINANCIAL RISK MANAGEMENT (continued)
Credit and Counterparty Risk (continued)
The breakdown of the underlying CLO investments by rating is as follows:

Rating

B
B+
B-
BB-
BB
BB+
CCC+
BBB-
CCC
CCC-
D
CC
NA

Total

31 December 2018

31 December 2017

Master Fund
%

Master Fund II*
%

Master Fund
%

Master Fund II*
%

37.1
20.4
14.3
11.5
6.8
3.7
3.2
0.8
0.5
0.1
0.1
0.0
1.5

41.8
19.9
14.0
11.2
6.6
2.9
1.6
0.6
0.3
0.2
0.0
0.1
0.8

38.2
21.4
12.8
14.2
5.2
2.8
1.8
0.7
0.3
0.2
0.4
0.0
2.0

43.1
22.0
12.0
13.2
4.3
2.0
1.1
0.5
0.2
0.1
0.2
0.0
1.3

100.0

100.0

100.0

100.0

*The Master Fund II’s exposure in the underlying CLO investments includes its exposure through its investment in the Master Fund.

Activities undertaken by the Company, Master Fund and Master Fund II 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.

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,  the  Master  Fund’s  and  the  Master 
Fund  II’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  indirect  investments  in  CLOs,  and  may  include  over-the-counter  derivative 
contracts, which are not traded in an organised public market and which may be illiquid.

51

 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

5.  FINANCIAL RISK MANAGEMENT (continued)

Liquidity Risk (continued)
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 Board of 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, Master Fund and Master Fund II are held by BNP Paribas Securities Services 
S.C.A., Guernsey Branch, in its capacity as the 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 of Director’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 2014 and 2017 shares. 
Capital is managed in accordance with the investment policy, in pursuit of its investment objectives. 

52

 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

6.  FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

Cost of ﬁnancial assets at fair value through proﬁt or loss  
at the start of the year

31 December 2018

2014 Shares
US$

2017 Shares
US$

Total Company
US$

39,910,455

354,964,125

394,874,580

Purchases of investments at cost during the year

–

70,200,000

70,200,000

Capital distributions received from the Master Fund  
during the year

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

(17,419,404)

–

(17,419,404)

22,491,051

425,164,125

447,655,176

Net unrealised losses on ﬁnancial assets at the end of the year

(4,333,950)

(58,158,870)

(62,492,820)

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

18,157,101

367,005,255

385,162,356

Movement in net unrealised loss during the year

(1,972,904)

(47,952,584)

(49,925,488)

Income distributions declared from the Master Fund  
during the year
Income distributions declared from the Master Fund II  
during the year

4,006,745

–

4,006,745

–

50,828,148

50,828,148

Net gains on ﬁnancial assets at fair value through proﬁt or loss

2,033,841

2,875,564

4,909,405

Cost of ﬁnancial assets at fair value through proﬁt or loss  
at the start of the year

Purchases of investments at cost during the year

Purchases of US Treasury Bills at cost during the year

31 December 2017

2014 Shares
US$

2017 Shares
US$

Total Company
US$

297,061,633

–

297,061,633

–

–

103,214,011

103,214,011

49,969,000

49,969,000

Re-designation of investment cost to 2017 Shares

(251,750,114)

251,750,114

–

Proceeds from sale of US Treasury Bills during the year

Realised gain on sale of US Treasury Bills during the year

Capital distributions received from the Master Fund  
during the year

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

–

–

(50,000,000)

(50,000,000)

31,000

31,000

(5,401,064)

–

(5,401,064)

39,910,455

354,964,125

394,874,580

Net unrealised losses on ﬁnancial assets at the end of the year

(2,361,046)

(10,206,286)

(12,567,332)

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

37,549,409

344,757,839

382,307,248

Realised gain on sales during the year

–

31,000

31,000

Movement in net unrealised loss during the year

(1,540,190)

(5,648,290)

(7,188,480)

Income distributions declared from the Master Fund  
during the year
Income distributions declared from the Master Fund II  
during the year

8,462,157

2,198,797

10,660,954

–

47,157,522

47,157,522

Net gains on ﬁnancial assets at fair value through proﬁt or loss

6,921,967

43,739,029

50,660,996

53

FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

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

During the year ended 31 December 2017, the Master Fund accepted Master Fund II as a limited partner. At 31 December 
2018,  the  Company’s  2014  Shareholders  had  a  11.31%  (31  December  2017:  11.31%)  holding  in  the  Master  Fund  and 
Master Fund II had a 62.82% holding in the Master Fund (31 December 2017: 62.82%). During the year ended 31 December 
2018, the 2017 Shareholders invested into Master Fund II, in which, other than the Fair Oaks Founder II LP, they are the only 
limited partner.

Look-through ﬁnancial information
The following tables reconcile the Company’s proportionate share of the Master Fund’s and Master Fund II’s ﬁnancial assets 
at fair value through proﬁt or loss to the Company’s ﬁnancial assets at fair value through proﬁt or loss:

31 December 2018

Master Fund*
US$

Master Fund II
US$

Total Company
US$

Financial assets at fair value through proﬁt or loss

20,544,242

370,132,597

390,676,839

Less: Net current liabilities

(2,387,140)

(3,127,343)

(5,514,483)

Total ﬁnancial assets at fair value through proﬁt or loss 

18,157,102

367,005,254

385,162,356

31 December 2017

Master Fund*
US$

Master Fund II
US$

Total Company
US$

Financial assets at fair value through proﬁt or loss

42,157,559

339,639,224

381,796,783

Less: Net current (liabilities)/assets

(4,608,150)

5,118,615

510,465

Total ﬁnancial assets at fair value through proﬁt or loss 

37,549,409

344,757,839

382,307,248

*Shows the Company’s proportionate direct share in the Master Fund at 11.31% through 2014 Shares investment only. 

The  Company’s  proportionate  share  of  the  unrealised  gains/(losses)  on  investments  in  the  year  comprises  the  following 
movements within the underlying investments:

31 December 2018

Master Fund*
US$

Master Fund II
US$

Total Company
US$

Net unrealised losses on investments at the beginning of the year

(2,361,046)

(10,206,286)

(12,567,332)

Investment income

Income distributions received from Master Fund

Income distributions received from Cycad

Unrealised losses on ﬁnancial assets at fair value through proﬁt 
or loss

Realised gains on ﬁnancial assets at fair value through proﬁt  
or loss

131,625

–

–

28,934,703

22,254,970

1,241,569

29,066,328

22,254,970

1,241,569

(65,574)

(49,349,074)

(49,414,648)

2,398,157

1,126,532

3,524,689

Net gains on derivative ﬁnancial instruments and foreign exchange

35,104

–

718,465

64,377

753,569

64,377

(465,471)

(2,115,978)

(2,581,449)

Other income

Expenses

Income distributions declared during the year

(4,006,745)

(50,828,148)

(54,834,893)

Net unrealised losses on investments at the end of the year

(4,333,950)

(58,158,870)

(62,492,820)

54

 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

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

Net unrealised losses on investments at the beginning  
of the year

Unrealised losses attributable to 2017 shares

Investment income

Income distributions received from Master Fund

Income distributions received from Cycad

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

Realised gains on ﬁnancial assets at fair value

Net losses on derivative ﬁnancial instruments and  
foreign exchange

Other income

Expenses

31 December 2017

Master Fund*
US$

Master Fund II
US$

Total Company
US$

(5,378,853)

–

(5,378,853)

(3,955,152)

11,918,387

–

–

3,955,152

1,944,155

44,804,908

1,490,112

8,206,654

(14,118,009)

–

13,862,542

44,804,908

1,490,112

(5,911,355)

1,375,534

(99,153)

–

(49)

1,375,534

(99,202)

–

3,548

3,548

(3,767,509)

(1,128,581)

(4,896,090)

Income distributions declared during the year

(10,660,954)

(47,157,522)

(57,818,476)

Net unrealised losses on investments at the end of the year

(2,361,046)

(10,206,286)

(12,567,332)

*Shows the Company’s proportionate direct share in the Master Fund at 11.31% through 2014 Shares investment only. 

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.

55

 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

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 2018

Level 2 
US$ 

Level 3 
US$ 

Total
US$

– 

– 

385,162,356 

385,162,356

385,162,356 

385,162,356

31 December 2017

Level 2 
US$ 

Level 3 
US$ 

Total
US$

– 

– 

382,307,248 

382,307,248

382,307,248 

382,307,248

The investments in the Master Fund and the Master Fund II, which are fair valued at each reporting date, have been classiﬁed 
within Level 3 as they are not traded and contain unobservable inputs.

The following table presents the movement in Level 3 instruments:

Opening Balance

Purchases

Movement in net unrealised loss during the year

Capital distributions received from Master Fund

31 December 2018
US$

31 December 2017
US$

382,307,248

70,200,000

(49,925,488)

(17,419,404)

291,682,780

103,214,011

(7,188,479)

(5,401,064)

Closing Balance

385,162,356

382,307,248

Transfers between Level 1, 2 and 3
There have been no transfers between levels during the year ended 31 December 2018 or 31 December 2017. 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 and Master Fund II’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 2018

Level 2 
US$ 

Level 3 
US$ 

Total
US$

1,783,949 
(2,054) 

18,760,293 
– 

20,544,242
(2,054)

1,781,895 

18,760,293 

20,542,188

Master Fund*
Financial assets at fair value through proﬁt or loss 
Derivatives at fair value through proﬁt or loss 

Total 

56

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

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

Transfers between Level 1, 2 and 3 (continued)

Master Fund II
Financial assets at fair value through proﬁt or loss 
Derivatives at fair value through proﬁt or loss 

Total 

Level 1 
US$ 

– 
– 

– 

31 December 2018

Level 2 
US$ 

Level 3 
US$ 

Total
US$

5,136,632 
(174,300) 

364,995,965 
– 

370,132,597
(174,300)

4,962,332 

364,995,965 

369,958,297

*Shows the Company’s proportionate direct share in the Master Fund at 11.31% through 2014 Shares investment only. 

Master Fund*
Financial assets at fair value through proﬁt or loss 
Derivatives at fair value through proﬁt or loss 

Total 

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

Total 

Level 1 
US$ 

– 
– 

– 

Level 1 
US$ 

– 

– 

31 December 2017

Level 2 
US$ 

Level 3 
US$ 

Total
US$

17,038,163 
(8,580) 

25,119,396 
– 

42,157,559
(8,580)

17,029,583 

25,119,396 

42,148,979

31 December 2017

Level 2 
US$ 

Level 3 
US$ 

Total
US$

– 

– 

339,639,224 

339,639,224

339,639,224 

339,639,224

*Shows the Company’s proportionate direct share in the Master Fund at 11.31% through 2014 Shares investment only. 

The following table summarises the valuation methodologies used for the Company’s investments categorised in Level 3 as 
at 31 December 2018:

Security 

Master Fund 
Master Fund II 

Valuation 
methodology 

Unobservable
inputs 

NAV 
NAV 

Zero % discount 
Zero % discount 

Ranges

N/A
N/A

Fair Value 
US$

18,157,102 
367,005,254 

385,162,356

The following table summarises the valuation methodologies used for the Company’s investments categorised in Level 3 as 
at 31 December 2017:

Security 

Master Fund 
Master Fund II 

Valuation 
methodology 

Unobservable
inputs 

NAV 
NAV 

Zero % discount 
Zero % discount 

Fair Value 
US$

37,549,409 
344,757,839 

382,307,248

Ranges

N/A
N/A

57

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

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

The  Master  Fund  and  the  Master  Fund  II  have  engaged  an  independent  third  party  to  provide  valuations  for  their  CLO 
investments. The following table summarises, in the Company’s opinion, the valuation methodologies used by the independent 
third party to value the Master Fund’s and the Master Fund II’s investments categorised in Level 3 as at 31 December 2018:

Unobservable 
inputs 

Ranges 

Average 

Sensitivity to changes
in signiﬁcant
unobservable inputs

Fair Value 
US$

18,258,270 

Prices provided  US$0.4600 - 
by a third party 
US$0.8800 
agent 

US$0.6698 

Europe 

443,041 

Prices provided 
by a third party 
agent 

£0.5600 

£0.5600 

Prices provided  US$0.0100 - 
by a third party 
US$0.0160 
agent 

US$0.0131 

58,982 

18,760,293

Fair Value 
US$

Unobservable 
inputs 

Ranges 

Average 

Sensitivity to changes
in signiﬁcant
unobservable inputs

Asset Class 
Master Fund
CLO Income Notes 

United States 
of America 

Sub Fee Notes 

United States 
of America 

Asset Class 
Master Fund II
CLO Income Notes 

United States 
of America 

221,589,079 

Prices provided  US$0.6900 - 
by a third party 
US$0.8953 
agent 

US$0.7731 

Europe 

28,668,405 

Limited Partnerships

Prices provided 
by a third party 
agent 

£1.0000 

£1.0000 

Master Fund* 

100,846,199 

Zero % discount 

N/A 

N/A 

Cycad 

13,892,282 

Zero % discount 

N/A 

N/A 

364,995,965

*Subject to the Master Fund’s inputs detailed immediately above.

58

10% increase/decrease
will have a fair value
impact of
+/- US$1,825,827 

10% increase/decrease
will have a fair value
impact of
+/- US$44,304 

10% increase/decrease
will have a fair value
impact of
+/- US$5,898 

10% increase/decrease
will have a fair value
impact of
+/- US$22,158,907 

10% increase/decrease
will have a fair value
impact of
+/- US$2,866,841

10% increase/decrease
will have a fair value
impact of
+/- US$10,084,619

10% increase/decrease
will have a fair value
impact of
+/- US$1,389,228

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

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

The Master Fund and Master Fund II have engaged an independent third party to provide valuations for their CLO investments. 
The following table summarises, in the Company’s opinion, the valuation methodologies used by the independent third party 
to value the Master Fund’s and Master Fund II’s investments categorised in Level 3 as at 31 December 2017:

Unobservable 
inputs 

Ranges 

Average 

Sensitivity to changes
in signiﬁcant
unobservable inputs

Fair Value 
US$

Asset Class 
Master Fund
CLO Income Notes 

United States 
of America 

Sub Fee Notes 

United States 
of America 

Asset Class 
Master Fund II
CLO Income Notes 

United States 
of America 

Limited Partnerships

Prices provided  US$0.5200 - 
by a third party 
US$0.9000 
agent 

US$0.7338 

24,317,969 

Europe 

554,729 

Prices provided 
by a third party 
agent 

£0.6700 

£0.6700 

Prices provided  US$0.0190 - 
by a third party 
US$0.4300 
agent 

US$0.0514 

246,698 

25,119,396

Fair Value 
US$

Unobservable 
inputs 

Ranges 

Average 

Sensitivity to changes
in signiﬁcant
unobservable inputs

115,190,150 

Prices provided  US$0.8600 - 
US$0.9700 
by a third party 
agent 

US$0.9322 

Master Fund* 

208,558,674 

Zero % discount 

N/A 

N/A 

Cycad 

15,890,400 

Zero % discount 

N/A 

N/A 

339,639,224

*Subject to the Master Fund’s inputs detailed immediately below.

1% increase/decrease
will have a fair value
impact of
+/- US$243,179 

1% increase/decrease
will have a fair value
impact of
+/- US$5,547 

1% increase/decrease
will have a fair value
impact of
+/- US$2,467 

1% increase/decrease
will have a fair value
impact of
+/- US$1,151,901 

1% increase/decrease
will have a fair value
impact of
+/- US$2,085,587

1% increase/decrease
will have a fair value
impact of
+/- US$158,904

59

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

7. 

INTEREST INCOME

Interest income on ﬁnancial assets carried at amortised cost:

Cash and cash equivalents

For the year ended 
31 December 2018
US$

For the year ended 
31 December 2017
US$

203,850

203,850

41,105

41,105

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 Amended and Restated Investment Advisory Agreement 
dated 9 March 2017 (the “Investment Advisory Agreement”). The investment advisory fee is calculated and payable on the 
last business day of each month or on the date of termination of the Investment Advisory agreement. The base investment 
advisory fee will be reduced to take into account any fees received by the Investment Adviser incurred by the Company in 
respect of its investments in the Master Fund and Master Fund II (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

Less: Master fund II rebate

Net investment advisory fee

For the year ended 
31 December 2018
US$
4,012,666

For the year ended 
31 December 2017
US$
3,748,861

(1,885,186)

(1,919,375)

208,105

(3,011,317)

(526,758)

210,786

In circumstances where, as at the date the Net Asset Value per share of the 2017 Shares with respect to the last calendar 
month  of  a  calendar  quarter  (the  “Quarter  End  2017  NAV”)  is  published,  the  price  of  the  2017  Shares,  adjusted  for  any 
dividends declared if required, traded at close in the secondary market below their then-prevailing Quarter End 2017 NAV, 
the Investment Adviser agrees to reinvest and/or procure the reinvestment by an associate of it of (a) 25% of the fee which it 
received with respect to that quarter from the Company pursuant to the Investment Advisory Agreement which is attributable 
to the Net Asset Value of the 2017 Shares and (b) 25% of Master Fund II Priority Proﬁt Share which the General Partner 
received with respect to that quarter from the Master Fund and Master Fund II which is attributable to the Net Asset Value 
of  the  2017  Shares  by,  in  each  case,  using  its  best  endeavours  to  purchase  or  procure  the  purchase  of  2017  Shares  in 
the Company in the secondary market. The obligation to purchase or procure the purchase of such 2017 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: (i) the 2017 Shares did not trade at close in the secondary market at a discount to their then-prevailing 
Quarter End 2017 NAV; or (ii) where the 2017 Shares did trade at close in the secondary market at a discount to their then-
prevailing Quarter End 2017 NAV and it is unable to purchase or procure the purchase of 2017 Shares in the secondary 
market at a discount to their then-prevailing Quarter End 2017 NAV despite having used its best endeavours to do so; or 
(iii) Master Fund II commitment period has already expired, and, in each case, the Investment Adviser shall retain all fees 
it receives for such quarter. On 18 October 2018, the General Partner purchased 285,355 2017 Shares in the secondary 
market by way of reinvesting 25% of the quarter’s investment advisory fees.

60

 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

8.  RELATED PARTIES AND OTHER KEY CONTACTS (continued)

Investment Adviser (continued)
In circumstances where, as at the date the Net Asset Value per share of the 2014 Shares with respect to the last calendar 
month  of  a  calendar  quarter  (the  “Quarter  End  2014  NAV”)  is  published,  the  price  of  the  2014  Shares,  adjusted  for  any 
dividends declared if required, traded at close in the secondary market below their then-prevailing Quarter End 2014 NAV, 
the Investment Adviser agrees to reinvest and/or procure the reinvestment by an associate of it if (a) 25% of the fees which it 
received with respect to that quarter from the Company pursuant to the Investment Advisory Agreement which is attributable 
to the Net Asset Value of the 2014 Shares and (b) 25% of the Priority Proﬁt Share which the General Partner received with 
respect to that quarter from the Master Fund which is attributable to the Net Asset Value of the 2014 Shares by, in each case, 
using its best endeavours to purchase or procure the purchase of 2014 Shares in the secondary market. The obligation to 
purchase or procure the purchase of 2014 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 2014 Shares did not trade at close 
in the secondary market at a discount to their then-prevailing Quarter End 2014 NAV; or (ii) where the 2014 Shares did trade 
at close in the secondary market at a discount to their then-prevailing Quarter End 2014 NAV and it is unable to purchase or 
procure the purchase of 2014 Shares in the secondary market at a discount to their then-prevailing Quarter End 2014 NAV 
despite having used its best 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 Partners
The Master Fund and Master Fund II also pay the Founder Partner and Founder Partner II 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 threshold calculation of the Preferred Return will be based solely on distributions and not 
on NAV calculations so the Master Fund and Master Fund II will not pay any carried interest until their investors have realised 
the  amounts  drawn  down  for  investments  and  met  their  Preferred  Returns.  At  31  December  2018,  US$17,727,677  (31 
December 2017: US$16,729,932) carried interest was accrued at the Master Fund level, to be apportioned to and payable by 
all limited partners. At 31 December 2018, US$nil (31 December 2017: US$404,214) carried interest was accrued at Master 
Fund II level.

Other Material Contracts
Administrator
Praxis Fund Services Limited (the “Administrator”) is 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$31,000  (31  December  2017:  US$31,000), 
payable  quarterly  in  arrears  for  Administration  and  Accounting  services.  During  the  year  ended  31  December  2017,  the 
Administrator received an additional US$7,000 per annum for running the additional C Share class until it converted to 2017 
Shares. 

The  Administrator  is  also  entitled  to  an  additional  fee  for  assisting  with  reporting  under  Article  24  of  the  AIFM  Directive.  
The fee was originally £3,000 per return, per jurisdiction, until the C Share class converted to 2017 Shares. Under the dual 
share class structure, the reporting fee was reduced to £2,500 per return per jurisdiction and this fee was increased to £2,585 
per return, per jurisdiction, with effect from 1 May 2017.

The Administrator is also entitled to an annual fee of £500 in relation to FATCA reporting and acting as Responsible Ofﬁcer.

Custodian
BNP Paribas Securities Services S.C.A., Guernsey Branch (the “Custodian”) waived all fees on the basis that all assets are 
invested into the Master Fund and Master Fund II.

61

 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

8.  RELATED PARTIES AND OTHER KEY CONTACTS (continued)

Directors’ Fees
The Company’s Board of Directors are entitled to a fee in remuneration for their services as Directors at a rate payable of 
£43,000 each per annum (31 December 2017: £43,000). In addition, during the year ended 31 December 2017, a one-off 
payment of £5,000 was paid to each Director relating to the work performed in respect of the revised Prospectus, with an 
additional £2,500 due if additional raises total to US$100 million. The additional £2,500 was paid to each Director in the 
second half of 2017, when the US$100 million additional raises was achieved.

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

For the year ended 
31 December 2018
US$

For the year ended 
31 December 2017
US$

208,150

149,798

179,535

13,141

2,633

210,786

123,776

206,164

3,606

–

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 2018

31 December 2017

No. of 2017
Shares

Percentage

No. of 2017
Shares

Percentage

9,697

9,697

44,475

0.00%

0.00%

0.01%

9,697

9,697

29,475

0.00%

0.00%

0.01%

On 4 December 2018, Nigel Ward purchased 15,000 2017 Shares in the Company on the SFS of the London Stock Exchange.

During the year ended 31 December 2017, Nigel Ward purchased 10,000 C Shares which were converted to 10,082 2017 
Shares using the conversion ratio of 1.0082 2017 Shares for every one C Share held as at close on the conversion record 
date of 27 June 2017.

As at 31 December 2018, the Investment Adviser, the General Partner and principals of the Investment Adviser and General 
Partner  held  an  aggregate  of  1,976,446  2017  Shares  (31  December  2017:  1,370,344  2014  Shares),  which  is  0.47%  
(31 December 2017: 0.41%) of the issued 2017 share capital.

62

 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

9.  TAX STATUS 

The Company is exempt from Guernsey income tax and is charged an annual exemption fee of £1,200 under The Income 
Tax (Exempt Bodies) (Guernsey) Ordinance 1989.

10.  SHARE CAPITAL 

Following  the  EGM,  on  29  March  2017,  the  Company  announced  47,428,202  ordinary  shares  had  been  elected  for  re-
designation as 2014 Shares with an effective date of 5 April 2017, representing 15.3% of the ordinary shares in issue on that 
date. Consequently, 263,510,368 ordinary shares were re-designated as 2017 Shares, representing the balance of 84.7% 
of the ordinary shares in issue on that date. Based on the above election results and the ordinary share price as at close of 
business on 27 March 2017, the 2017 Share class had an opening market capitalisation of approximately US$262.2 million. 
The cost of re-designation which has been expensed during the year was US$877,172.

On 5 April 2017, 47,428,202 2014 Shares, 263,510,368 2017 Shares and 68,850,000 C Shares were admitted to trading 
on the SFS of the Main Market of the LSE. 

On 28 July 2017, the Company returned US$910,994 to 2014 shareholders by way of compulsory partial redemption of 
926,919 2014 Shares at US$0.9828 per share.

On 2 October 2017, 28,000,000 2017 Shares were issued at US$1.00 per Share and on 17 November 2017, 57,350,000 
Shares were issued at US$1.0075 per Share.

On 9 February 2018, 73,799 2017 Shares were admitted to trading on the Specialist Fund Segment of the Main Market of 
the LSE. 

On 4 April 2018, 35,000,000 2017 Shares were admitted to trading on the Specialist Fund Segment of the Main Market of 
the LSE. Following the issue, the Company has 453,348,737 2017 Shares in issue.

On 6 July 2018, the Company returned US$6.5 million to 2014 shareholders by way of compulsory partial redemption of 
7,165,688 2014 Shares at US$0.9071 per share.

On 3 October 2018, the Company returned US$12.5 million to 2014 shareholders by way of compulsory partial redemption 
of 14,068,640 2014 Shares at US$0.8885 per share.

On 28 November 2018, the Company returned US$3.0 million to 2014 shareholders by way of compulsory partial redemption 
of 3,324,818 2014 Shares at US$0.9023 per share.

The Company’s 2017 and 2014 Shares are classiﬁed as equity. Incremental costs directly attributable to the issue of 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 of a particular class or tranche are entitled to receive, and participate in, any dividends or other 
distributions relating to the assets attributable to the relevant class or tranche which are 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 of a particular class or tranche shall be entitled to the surplus assets 

attributable to that class or tranche remaining after payment of all the creditors of the Company

63

 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

10.  SHARE CAPITAL (continued)

(c)  Voting:  Subject  to  any  rights  or  restrictions  attached  to  any  class  or  tranche  of  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 class or tranche of 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 ten per cent. (or such other percentage as may be prescribed from time to time 
by the States of Guernsey Committee for Economic Development) of the total number of issued shares of that class.  
Any shares acquired in excess of this limit shall be treated as cancelled.

The C share capital of the Company was represented by 68.85 million C Shares of nil par value for the period 5 April to  
27 June 2017 and had the following rights: 

(a)  Dividends: Holders of C Shares were entitled to receive, and participate in, any dividends declared only insofar as such 
dividend is attributed, at the sole discretion of the Board of Directors, to the C Share surplus of that class. The holders of 
ordinary shares, which arose after conversion of the C Shares in issue, 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 2014 Share surplus shall be divided amongst the holders of 2014 Shares of the relevant class pro rata to their 
holdings of 2014 Shares in such class as if the 2014 Share surplus comprised the assets of the Company available 
for distribution; 

(ii)  the 2017 Share surplus shall be divided amongst the holders of 2017 Shares of the relevant class pro rata to their 
holdings of 2017 Shares in such class as if the 2017 Share surplus comprised the assets of the Company available 
for distribution; and

(iii) the C Share surplus attributable to each class or tranche of C Shares shall be divided amongst the C Shareholders of 

such class or tranche pro rata according to their holdings of C Shares of that class or tranche.

(c)  Voting: The C Shares carried the right to receive notice of, and to attend or vote at, any general meeting of the Company 
in the same manner as the 2017 and 2014 Shares (notwithstanding any difference in the respective NAV of the C Shares 
and 2017 and 2014 Shares).

Issued Share Capital
2017 Shares

31 December 2018

31 December 2017

Share capital at the beginning of the year

418,274,938

406,185,791

–

Shares

US$

Shares

US$

–

Share capital issued during the year

35,000,000

33,627,207

85,350,000

84,707,871

Share capital issued for scrip dividend

73,799

75,275

–

–

Re-designation of 2014 Shares during the year*

Conversion of C shares during the year

–

–

–

–

263,510,368

253,488,546

69,414,570

67,989,374

Share capital at the end of the year

453,348,737

439,888,273

418,274,938

406,185,791

64

 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

10.  SHARE CAPITAL (continued)

Issued Share Capital (continued)
2014 Shares

31 December 2018

31 December 2017

Shares

US$

Shares

US$

Share capital at the beginning of the year

46,501,283

44,713,419

310,938,570

299,112,959

Re-designation to 2017 Shares during the year*

–

–

(263,510,368)

(253,488,546)

Share redemptions

(24,559,146)

(21,996,985)

(926,919)

(910,994)

Share capital at the end of the year

21,942,137

22,716,434

46,501,283

44,713,419

* Includes non-cash conversion from 2014 Shares to 2017 Shares of US$253,488,546. 

C shares

Share capital at the beginning of the year

Issued share capital

Conversion of C shares to 2017 Shares during the year

Conversion of C shares to 2014 Shares during the year

Share issue costs

Total share capital at the end of the year

31 December 2017

Shares

–

US$

–

68,850,000

68,850,000

(68,850,000)

(67,989,374)

–

–

–

–

(860,626)

–

On 5 April 2017, 68,850,000 C Shares were issued at an issue price of US$1.00 per C Share for cash consideration. 

The  conversion  ratio  was  1.0082  2017  Shares  for  every  one  C  Share  held  as  at  close  on  the  conversion  record  date  of  
27 June 2017. Entitlements to new 2017 Shares were rounded down to the nearest whole share. 

11.  EARNINGS PER SHARE

Weighted average number of shares

Proﬁt for the ﬁnancial year

Basic and diluted earnings per share

For the year ended
31 December 2018

For the year ended
31 December 2017

2014 Shares
US$

39,412,384

US$1,922,876
US$0.0488

2017 Shares
US$

444,327,153

US$2,306,790
US$0.0052

2014 Shares
US$

47,032,039

2017 Shares
US$

313,278,244

US$6,747,931
US$0.1435

US$41,670,885
US$0.1330

The weighted average number of shares as at 31 December 2018 and 31 December 2017 is based on the number of 2014 
and 2017 Shares in issue during the period under review, as detailed in Note 10.

12.  TRADE AND OTHER PAYABLES

Investment advisory fees payable (note 8)

Audit fees payable

Administration fees payable (note 8)

Sundry expenses payable

31 December 2018
US$

31 December 2017
US$

13,141

23,508

2,633

9,797

49,079

3,606

15,960

–

24,400

43,966

65

 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Notes to the Financial Statements (continued)
For the year ended 31 December 2018

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 2017: US$306,327,883) which has been fully 
called. The Commitment Period ended on 12 June 2016.

The  Company  entered  into  a  subscription  agreement  with  the  Master  Fund  II  and  agreed  to  become  a  Limited  Partner 
and  made  a  commitment  to  the  Master  Fund  II  of  US$433,996,752  (31  December  2017:  US$407,420,957)  of  which 
US$429,120,957 (31 December 2017: US$358,920,957) had been called. 

At 31 December 2018 and 31 December 2017, the Company had no further outstanding commitments.

14.  SUBSEQUENT EVENTS

On 10 January 2019, the Company declared an interim dividend of 4.26 US cents per 2014 share and 3.45 US cents per 
2017 share in respect of the month ended 31 December 2018, which was paid on 31 January 2019. The ex dividend date 
was 17 January 2019.

On  6  February  2019,  the  Company  declared  a  monthly  dividend  of  0.70  US  cents  per  ordinary  share  in  respect  of  the 
month  ended  31  January  2019  to  both  the  2017  Shares  and  the  2014  Shares,  which  was  paid  on  28  February  2019.  
The ex dividend date was 14 February 2019.

On 5 March 2019, the Company declared a monthly dividend of 0.70 US cents per ordinary share in respect of the month 
ended 28 February 2019 to both the 2017 Shares and the 2014 Shares, which was paid on 28 March 2019. The ex dividend 
date was 14 March 2019.

On  13  March  2019,  the  Company  announced  a  ﬁnal  compulsory  redemption  of  all  2014  Shares  at  a  price  equal  to  the 
NAV per 2014 Share as at 28 February 2019 less the dividend to be declared for the month ended 28 February 2019 (the 
“Redemption Price”).

The consideration for the redemption was, as default, a US Dollar cash payment. This cash payment was funded by the Master 
Fund II acquiring at NAV the residual interest in the Master Fund owned by the Company in respect of 2014 Share class. 
There was also an option to receive an in specie distribution of a 2014 Shareholder’s pro rata exposure to the Company’s 
interest in the Master Fund. All holdings of 2014 Shares on the register at the close of business on the record date, being  
1 April 2019, were redeemed. 

On 15 March 2019, the Company announced the ﬁnal Redemption Price per 2014 Share of US$0.8155 being the NAV per 
2014 Share as at 28 February 2019 of US$0.8225 less the 0.70 US cent dividend declared for that month. 

On 3 April 2019, the Company announced with regards to the ﬁnal redemption of 2014 Shares, as noted above, that the rate 
per share to be used to pay shareholders who elected to receive their redemption proceeds in sterling will be GBP 0.6191 per 
share. It is expected that the proceeds of the redemption will be paid through CREST to holders of Shares in uncertiﬁcated 
form, and by cheque to holders of Shares in certiﬁcated form on 15 April 2019.

Furthermore, the Company notiﬁed that its issued share capital now consists of 453,348,737 2017 Shares only, further to 
the ﬁnal redemption of 21,942,137 2014 Shares effected on 1 April 2019. None of these 2017 Shares are held in Treasury, 
therefore, the total number of 2017 Shares with voting rights in the Company is 453,348,737. The 2014 Shares are now 
disabled on CREST and the line of stock cancelled.

On 4 April 2019, the Company declared a monthly dividend of 0.70 US cents per ordinary share in respect of the month 
ended 31 March 2019 to the 2017 Shares, which was paid on 25 April 2019. The ex dividend date was 11 April 2019.

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

66

 
 
 
 
 
 
 
 
 
 
 
 
 
FAIR OAKS INCOME LIMITED ANNUAL REPORT AND AUDITED FINANCIAL STATEMENTS

Portfolio Statement (unaudited)

As at 31 December 2018

Issuer

Instrument

Par Value

Valuation

Master Fund I

Master Fund II*

AIMCO 2015-AX SUB
ALLEG 2014-1X SUB
AMMC 2014-15X SUB
AWPT 2014-3A SUB
AWPT 2014-3 F
AWPT 2014-3X FEE
AWPT 2015-4X FEE
AWPT 2015-4X SUB
HARVT 7X SUB
NEUB 2015-19X SUB
NEUB 2015-20X SUB
SHACK 2015-8X SUB
SYMP 2013-12A F
TICP 2015-1X SUB
AIMCO 2017-AX SUB
ALLEG 2017-2X SUB
ARES 2015-35RX SUB
AWPT 2017-6X SUB
ELM 2014-1A SUB
HLM 13X-2018 SUB
HLM 13X-18 F
MARNR 2015-1A SUB
MARNR 2016-3A SUB
MARNR 2017-4X SUB
POST CLO 2018-1X SUB
SHACK 2018-12X SUB
WELF 2018-1X SUB
FAIR OAKS LOAN FUNDING I

Subordinated Notes
Subordinated Notes
Subordinated Notes
Subordinated Notes
Class F Notes
Subordinated Fee Notes
Subordinated Notes
Subordinated Fee Notes
Subordinated Notes
Subordinated Notes
Subordinated Notes
Subordinated Notes
Class F Notes
Subordinated Notes
Subordinated Notes
Subordinated Notes
Subordinated Notes
Subordinated Notes
Subordinated Notes
Subordinated Notes
Class F Notes
Subordinated Notes
Subordinated Notes
Subordinated Notes
Subordinated Notes
Subordinated Notes
Subordinated Notes
Equity Notes

US$25,000,000
US$20,800,000
US$31,000,000
US$27,000,000
US$4,300,000
US$20,500,000
US$19,350,000
US$19,350,000
€6,100,000
US$30,362,500
US$38,000,000
US$28,000,000
US$13,000,000
US$21,500,000

US$21,105,000
US$13,066,560
US$19,474,200
US$16,961,400
US$2,701,260
US$12,878,100
US$12,155,670
US$12,155,670
€3,832,020
US$19,073,723
US$23,871,600
US$17,589,600
US$8,166,600
US$13,506,300
US$27,080,000
US$39,875,000
US$26,000,000
US$30,050,000
US$6,324,243
US$25,950,000
US$5,737,500
US$6,537,420
US$6,167,914
US$28,890,000
US$39,282,500
US$30,000,000
US$28,875,000
€25,000,000

88.0%
75.0%
70.0%
46.0%
95.6%
1.6%
60.0%
1.0%
56.0%
62.0%
72.0%
71.0%
89.7%
56.0%
69.0%
79.0%
74.0%
79.0%
75.5%
82.2%
89.5%
77.0%
82.0%
80.0%
78.0%
83.0%
82.0%
100.0%

*Master fund II holdings include investments held indirectly via Master Fund II’s 62.82% interest in the Master Fund and its 14.96% interest in Cycad Investments LP. 

67

FAIR OAKS INCOME 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
Link Market Services (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
1 Albemarle Street
London W1S 4HA 

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

Custodian and Principal Bankers
BNP Paribas Securities Services S.C.A.
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

68

PRODUCED BY TPA - GUERNSEY