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Saturday, 25 May 2019

Five things you want to know about the upcoming Astrea V PE Bonds

I believe there will be a lot of interest for the upcoming Astrea V Class A-1 PE Bond looking at how oversubscribed it was in Astrea IV (7.4x). 

I will do a "sneak" preview first before I do a more detailed analysis when the public offering starts since some of you may be keen to get your hands on the placement tranche. 

Here are 5 things that you may want to know about the offering. 

1. Interest rate (Pricing) for the bonds will be determined by a book building process

I think this is the question on everyone's mind. What will the interest rate be? 

The interest rate environment in June last year was much more "bullish" where FED was expected to keep raising the treasury rate. That stance has changed quite dramatically over the last 9 months. As such, the pricing expectations of institutional investors have became more realistic. 

In addition, retail investors are not "helping themselves" by pushing the price of Astrea IV Class A-1 to 107.  🤣

As such, it is highly unlikely that the interest rate for Class A-1 will be similar to Astrea IV. My own gut feel is that the 5 year bond will at around 4%. As in Astrea IV, there will be a little "bonus" of 0.5% of the principal amount of Class A-1 should the underlying portfolio performs well. 

My "prediction" on the likely interest rates for Astrea V below based on current secondary trading levels, institutional demand and gut feel. 
Class A-1 : 3.9% to 4.1%
Class A-2 : 4.8% to 5%
Class B : 5.9% to 6.1%

2. The public tranche of Class A-1 is going to be larger and the interest rate is set by the institutional investors 

In Astrea IV, the retail tranche was S$121m with another $121m for placement. 

In Astrea V, the Class A-1 tranche is $315m. Assuming half goes to public, the offer will be at least $158m in size. Based on the oversubscribed levels in Astrea IV, I hope more will be set aside for the public and i would expect $160-190m be set aside for retail investors. 

The interest rate for the retail offering will be set by the institutional investors during the book building process 

3. Prior Astreas has done very well. Class A-1 for Astrea IV was upgraded by Fitch in May 2019. Class A-1 was rated a notch higher by S&P in Astrea V as compared to Astrea IV

In case you didn't read the press releases, the Class A-2 and Class B bonds in Astrea III were upgraded by a notch.  In addition, Class A-1 of Astrea IV was also upgraded by Fitch to its "cap" of A+ within 9 months of its launch. 

I have to say the upgrade of Class A-1 in Astrea IV was "timed to perfection" for the upcoming Astrea V. It inevitably drives the pricing of Astrea V downwards as investors form their views (rightly or wrongly) using the performance of Astrea IV.  

In addition, S&P issued a "A+" rating for Class A-1 in Astrea V. This is a notch higher vis-a-vis their own rating of Astrea IV. In the corporate bond world, it is usually quite rare for S&P to give a higher rating than Fitch for the same class credit. 

4. Demand will be very hot and allocation will likely be very bad. I hope there is a rethink of how the bonds are allocated 

If you looked at the balloting table in Astrea IV where it was 7.4x subscribed, the issuer adopted a "everyone gets some bonds" approach. Given that they are unable to "upsize" the issuance, the allocation was really bad. The more you apply the "lesser" you get. 

Since the issuance this time round is larger, i hope the Issuer will continue to favour retail investors and improve the allocation rate. 

Some of my friends applied for $50-$100k last time and were allotted $5k. Being allotted $5k is "neither here nor there". You don't know whether to hold on to them or to sell them... Sometimes, under such circumstances, it might be better to do some balloting to ensure a more meaningful allocation can be made (i.e. instead of $5k, maybe $15-20k for the "lucky" applicants). 

I always wonder why there is a need to adopt such "egalitarian" allocation approach. You can see that in the Temasek 2.7% bonds allocation as well.

Trying to please everyone sometimes make everyone upset instead 🤣🤣🤣 

5. The IPO is likely to be launched in mid June

I guess the final thing that you want to know other than pricing is when will the IPO be launched? 

Based on Astrea IV's time table, the offering was made in mid June. Since the preliminary prospectus of Astrea V was also done around the same time, it is pretty easy to predict when the launch will be. 

Unless MAS receives "poison pen" letters on why the allocation was so bad last time, the IPO is likely to happen along the same timeline - in middle of June. 

Now is polling time - The question for today.... If you can decide, how would you allocate the Astrea V bonds? Every vote counts!! Take the poll here.

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