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Friday, 8 June 2018

Astrea IV Class A-1 Bonds


Astrea IV is the first listed retail private equity bond and is offering 3 classes of bond, Class A-1, Class A-2 and Class B Bonds as shown in the table below. 

Half of the S$121m of Class A-1 Bonds will be available for retail investors through a public offering. The remaining $121m Class A-1 placement tranche, Class A-2 and Class B have already been placed out and fully subscribed.

According to Bloomberg announcements and press releases, the Issuer received order book of $1.8b from more than 100 accounts. This means that the placement tranche was subscribed by 4.5x. The institutions are sophisticated investors and this is a definitely a strong order book considering the current market. Given the strong institutional demand, i would expect this PE Bond to be very chilli hot with retail investors as well ...

Given that the only tranche available for the IPO is only Class A-1, the focus of my write up will be limited this tranche. The bond IPO will end on 12 June 2018 at 12pm.

It took me a few hours to figure out how the Astrea IV PE Bonds work and I will try to summarise it as simply for you as possible...  😎



What are Private Equity Bonds ("PE Bonds")?

PE Bonds are basically bonds that are backed by cash flow from the private equity funds. 

To put it simply, the 36 private equity funds in Astrea IV hold a lot of underlying companies (596 to be exact) and when a private equity fund sells one portfolio company, the cash that is generated by the sale will be returned to its investors (i.e. Astrea IV). This cash proceeds will then be used to pay bond holders and other obligations. The sector breakdown of the 596 companies are presented below.


What are the Private Equity Funds?

The list of 36 Funds can be found in the prospectus. You can also see the portfolio in the Fitch Report as well. The Fitch report is actually quite good and the link is here


The list of funds are actually of very high quality. Names that are quite well known include Apollo, Blackstone, CVC, KKR, TPG and Warburg Pincus.

To understand the managers better, the websites of some of the managers and companies are as follows:
  1. Apollo Global Management - Fund VI and Fund VII are in Astrea IV. You can find out more of about the company and some of its past investments here 
  2. Bain Capital
  3. Blackstone Fund VI is the largest position at 9.2% NAV and Blackstone is GP with the largest position at 10.6%. You can find out more about the Manager here
  4. Carlyle VI - You can see some of the current investments here 
  5. EQT Mid Market 
  6. IK Fund VII has 15 companies. You can find more details about the Fund and the 15 companies here 
  7. KKR is one of the pioneers of Private Equity founded by Henry Kravis and George Roberts. KKR is well represented here with 3 funds, KKR 2006, KKR North American XI and KKR Asian Fund II. The website is here. It is interesting to note that KKR Asia Fund II invested in Go-Jek (see news release here)! 
  8. Silver Lake
  9. TPG
  10. Warburg Pincus
According to the Fitch report, the quality of the portfolio is pretty good with most of them in the top 3 quartiles.  


My view on the portfolio - This is an excellent portfolio which most investors (other than pension funds and SWFs) cannot gain access to ... too bad only the bonds are on offered. The portfolio should generate sufficient cash flows to repay investors



Who is the Sponsor?

The Sponsor is wholly owned ultimately by Temasek. With such a strong Sponsor, the Issuer even have to put out a FAQ to tell you that the bonds are not guaranteed by Temasek . . . 😂  hahaha probably the bankers are selling the bonds to their investors using Temasek as the key selling point ? 🤔

What is the priority of payment

The priority of payment determines how the cash generated by the 596 companies can be used for every 6 months.

You can see that bond holders ranked ahead of the Sponsor in the graphical presentation below


What is the Loan to Value


The loan to value shows you the ratio of "outstanding bonds to remaining portfolio value". The Issuer has to maintain a ratio of 50% or less. This is a strong protection mechanism as it ensures that there is sufficient asset coverage of 2x. In the unlikely event of default, if the value of the assets can be relied upon, then you can sell the assets and repay the bond holders. 

From the chart above, you can see that Class A-1 has a LTV of 16.5%... this is pretty low and is ranked ahead of Class A-2, B and Equity.

What is the Interest Rate? 

The Class A-1 Bonds has an interest rate of 4.35% per annum and the interest payable semi-annually.  

A bonus of 0.5% of the principal amount will be paid out if certain performance threshold is met. Based on my analysis, this bonus is a "give-away", so i am expecting this bonus to be paid out at the end of year 5.

Illustration - Repayment Schedule assuming you invest $100,000 of Class A-1 bond 

  

When will i get repaid?

According to the prospectus, you will get repaid on year 5 (the 10th distribution date) when there are sufficient cash in the Reserves Account. It is interesting to note that the cash of US$40m will be set aside every 6 months for the first 5 distribution dates and US$39m for the remaining 5 distribution dates. In total, there will be US$395m in the Reserves Account and end of year 5 (more than than US$391 million principal amount). 

However, Class A-1 Bond Holders will be paid ahead of Class A-2 bond holders from this Reserve Account. This is quite funny given Class A-1 and Class A-2 are considered pari passu (whatever that means).

In other words, Class A-1 bonds are "super senior" and "super safe" because you only need $181m in the Reserves Account to fully redeem Class A-1. Probably that is why it is suitable for retirement income ... !?! (see article here)

This means that by year 2.5, there will be US$200m in the reserves account and that is more than sufficient to repay the class A-1 bonds. Class A-1 bondholders will be "de-risked"  in 2.5 years since they are repaid ahead of Class A-2 bond holders. 

According to the prospectus, there is also a chance that the balance in the reserves account can be accelerated if the underlying cash flows are strong due to "Sponsor Sharing".



If the Cash Flow are so strong, what is the Liquidity Facility for?

There is a $100m liquidity facility that is provided by DBS Bank at the onset. This facility can be drawn upon if there is a shortfall (another GFC?). The facility will help ensure that bond holders receive their interest at the end of each 6 months. This is a structural safeguard for bond investors. 

In other words, if there is another crisis where there are no cash flows from the PE Funds, DBS bank will step in to pay you interest! However, you better pray that the crisis last less than 3 years, otherwise Astrea IV will go kaput.  hahaha

What is this "A" rating?

S&P and Fitch gave the Class A-1 bonds an "A" rating. 

Have you ever wondered why the retail bonds (Perenial, Aspial, Oxley) and Hyflux Perps are not rated ? This is because it is first of all, costly to get a rating and even if they tried to get one, they will probably get a junk rating. 😂

Most of the wholesale bonds here are also not rated. Hence it is actually quite significant for the bonds to be rated and it provides additional comfort to retail investors that two reputable rating agencies have reviewed this product. The S&P report is here

What is the chance that I will not be repaid? and by when? 

Zero. Actually i didn't say it. 

According to the prospectus pages 125 to 128, the latest you can get repaid is year 6 and that is taking into account 3 years of drought (zero cash flow). 

As such, under normal circumstances, Class A-1 investors will get repaid in year 5.


The independent research consultant (page 129 to 147) using a Monte Carlo analysis also said so .. . (See table below) 



Fair Value of the Bonds


According to the article in Business Times today, retail investors are being "looked after" . . . in other words, the Issuance is priced to sell and they probably left some money on the table. A similarly rated bond will be trading at between 2.96% to 3.57%. At an interest rate of 4.35% (excluding the potential bonus), it is attractively priced. Definitely much better than the pathetic interest rates from the banks.

My view: If you have spare cash that you can hold for 5 years, or if your cash is sitting idle in the SRS account, you can consider parking some of the cash in the Class A-1 bonds instead. BUT please do not treat this as an equity IPO and expect a "pop" on day 1.... It is not supposed to "pop" as this is a YIELD product


What I like about the Bonds
  • Reputable Sponsor with track record - This is the 4th series of the Astrea Bond and the Issuer is wholly owned by Temasek. The first transaction was done in 2006, implying they have long track record
  • Quality PE Funds - The portfolio is of good quality and managed by well known managers. There are hidden value in this portfolio as some of the funds are only 4 years old and there is potential for the funds to appreciate in value
  • Strong equity ownership - The Sponsor continues to hold the equity interest in the structure, providing strong alignment of interest
  • Bonus sharing - I like the sharing mindset of the Sponsor, especially with retail investors  
  • Super safe - This is a super safe product. You have two rating agencies rating it A, you have the Issuer and Independent Research Consultant telling you that your money will get repaid in year 5, and you have Fitch telling you that the sponsor has a non-financial objective for doing this 😀
Some of my concerns
  • Why only Class A-1 for retail investors - My view is that the product is pretty safe and the interest rates of Class A-2 and B are definitely more attractive. Perhaps the Issuer can considering offering these other tranches to retail investors in future
  • Bond like returns from PE asset class - While i appreciate the attractive coupon, the underlying asset class is definitely capable of generating better returns. In future, maybe a rating is not necessary and the "savings" can then be passed on to investors as higher returns hahaha
  • Small bonus element - the bonus element can be higher, i rather they pay less interest to Class B and give more to us!  (starting to get greedy...😋)
  • It is not easy to understand - The priority of payment and the structure is not easy to understand and you will need to spend time to read it. I appreciate the efforts the Issuer has in trying to make investors understand by having a colorful gatefold, public presentations. They have also put up explainer videos on their website. The explainer video is pretty good and i would strongly encourage you to view it here.
Mr IPO's conclusion

My Chilli ratings usually apply to equity IPOs and is not designed with Bonds in mind. hahaha. 

Assuming the chilli ratings is based on the attractiveness of the yield and how "safe" it is, then it will definitely be a 3 CHILLI HOT rating from me.

This is one of the rare chances for retail investors to invest in such a high quality bond. 

Will you apply for Astrea IV Class A-1 Bond?

Polling time - will you apply for the bond? Take the poll here.






Monday, 28 May 2018

Jawala Inc


Jawala Inc ("Jawala" or the "Group") is offering 18m shares at $0.25 each for a listing on Catalist, of which 17.6m shares will be via placement and the balance 0.4m shares for public offer. The offer will close on 30 May 2018 at 12pm. The market cap post listing is $29.6m.

Principal Business

The Group is a forest resource company based in Malaysia with a focus on industrial tree plantation in Sabah. The main business is the management of forestry resources, and the planting and extraction of timber. 

Jawala currently manages a licensed area of 11,043 hectares in the Sapulut Forest Reserve for 100 years starting from 12 Aug 2015. Upon expiry, the Chief Minister has discretion to grant a further extension of the license for another 100 years.

Financial Highlights

The Group is profitable in FY2017 and 1Q 2018 revenue and profitability has also grew significantly compared to the prior quarter. I have no idea how to project the performance since i am not privy to the financials

The Group is listing at a historical PER of 62.7x but that may not be a fair reflection as Q1 2018 has shown a much higher profitability. Without any guidance, it is tough to project what is the valuation at which the Group is listed. Using the Q1 EPS multiply by 4 also doesn't sound quite right either.

Prospects

I have no idea what the future prospects hold but i guess what the Group is trying to tell you is that the value of the "wood assets" is on an uptrend

Future Plans


The Group is raising ~$3m to develop the plantation site and for working capital, the balance $1.35m is for listing expenses. Not sure if it can execute what it wants to do unless the funds are generated internally. The amount raised from the IPO is probably not sufficient to execute all its plans.

What I like about the Group
  • Profitable Group - The Group has a Q1 profit of RM4m and that is significantly higher than Q1 2017. However, i am not sure if this is one time profit or it is sustainable
  • Sustainable forest management  - While i don't like companies cutting down forest indiscriminately, the way to go is to ensure the wood is being harvested in a responsible manner
Some of my concerns
  • Change in government may led to change in natural resources policy in Malaysia - While the license has been granted, a change of government may have unintended consequences and impact the Group. I am not sure why the Chief Minister has "discretion" to grant another 100 years but this discretion may be removed in due course
  • Valuation of natural resources is challenging - I am no expert in this field and even then, the valuation of such assets is definitely challenging. I am not sure if you remember the Sino Forest scandal but it is definitely not easy to value such assets and having management you can trust is absolutely critical 
  • Non big 4 auditor - With no due respect, my preference is for a big 4 to be the auditor of this Group
  • Why bother having a public tranche given the small issuance size - While i am always a proponent of company offering some shares for the public, but given the small issuance size, it just doesn't make sense to waste time and money on a public tranche as the total amount raised is low. This is also a pretty small cap company.
  • All the shares are held by Datuk Jema Khan - He holds 84.4% of the Company and the balance is held by the public. Trading post listing will be limited as the shares will be tightly held
  • IPO sentiments is weak - The local market sentiments has been pretty weak for a while now. While the number of shares issued can be tightly controlled, it doesn't solve the overall negative market sentiments
Chilli Ratings

While the Group is turning profitable, I will give it a miss due to the concerns raised above. It will be a zero rating for me.  

Happy Jawalaing

Polling Time

You can take the poll here.


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