Astrea VI Class A-1 Bonds is offering $250m for the initial public offer. The offer will close on 16 March 2021 at 12 noon. The interest rate for the 5 year bonds is 3% and is rated A+ by both S&P and Fitch.
The management of Azalea has spent a lot of time to create a
comprehensive website that includes a management presentation video and conducted a
live Q&A session to help investors understand how the bonds work before applying. So if you are not going to help yourself to these materials, I guess your only hope is to read my blog 😋.
I will write this article using a Q&A format and answer some of the most pertinent questions you may have for this retail bond issuance.
What are Astrea PE bonds in a nutshell?
You, (together with Class A-2 and B bond holders) are lending money to the Issuer against a portfolio of PE funds. Every 6 months, any cash generated by this portfolio will flow through a "waterfall" and some of the cash will be used to pay for the interest and to set aside equal instalments for the eventual principal repayment at end of year 5.
What is the leverage level of Astrea VI at Issuance?
As you can see from the picture below, the portfolio has a value of US$1,456m and the bonds issued amount to US$643m. In other words, the Loan-to-Value ("LTV") at issuance is 44.2%.
Key takeaway - The lower the LTV, the more secured the bonds.
What is the portfolio of PE funds that is backing the bonds? Is it of good quality?
The portfolio comprises of 35 PE Funds managed by 28 GPs. The 35 PE Funds invested in 802 underlying companies. In other words, the cash flows that is used to service the bond obligations come from 802 different investee companies and they are diversified across different sectors as shown below. The top 3 sectors are likely to do well even in a post Covid world.
One of my friends who worked in the PE Funds industry shared that that it is a very high quality portfolio but the Issuer is limited in how much they can disclose due to confidentiality imposed by the underlying managers.
He further added that a good quality portfolio will appreciate in value over time. That is why we can see that the LTV for Astrea IV and Astrea V moving down from around 45% to below 40% over time.
Why is the weighted average vintage year of the Astrea Portfolio important?
The portfolio has a 5.8 years weighted average age. To understand why this figure is important, you need to know how a PE fund works. A buyout PE fund usually have a fund life of 10-12 years. In the initial 3 to 4 years (investment period), the manager of a PE fund draws down cash from investors to make 10 to 15 investments. Once invested, the manager will make operational improvements to the company to increase Sales and hopefully, EBITDA over the next 3-4 years. After creating value at the underlying portfolio company, the manager will want to sell the company for a profit, usually 2x the cost or better.
If the portfolio is too young (let's say 2 years old), it means the PE funds will need cash to make investments as it is still in the investment period. There may not be enough cash to service the bond obligations in the near term.
If the portfolio is too old (say 10 years), it means that the portfolio is very mature and comprises old assets. These companies are usually the more challenged and upside potential may be limited.
As such a portfolio that is between 4-8 years are at the right age and very cash flow generative. I would be concerned if the portfolio has a weighted age of more than 10 years.
Why is the waterfall important? What are the most important clauses.
The waterfall ensures you gets repaid eventually. The two most important clauses of the water (if you bother to read the prospectus) is Clause 8 and Clause 10.
Clause 8 ensures that the structure sets aside cash for the principal repayment at the end of year 5. It has a catch up feature, meaning that if the structure did not deposit the required scheduled reserves for that period, it will need to "top up" the reserves in subsequent periods.
Clause 10 ensures that there is always twice the amount of assets in the structure against the outstanding bonds liability before any cash can be distributed to the equity holder.
A pictorial view of the waterfall from the gatefold for your understanding (follow the man in 'red' walking down the yellow steps (a.k.a. 'waterfall')
Is 3% a fair value for Class A-1 Bonds?
According to someone who works in the the fixed income department of a large insurance company and participated in the placement tranche - the Issuer could have easily tighten the yield to below 3% as the SGD books were mulitple times oversubscribed. The overall books were
7x subscribed.
Looking at where the current marks of Astrea IV Class A-1 and Astrea V Class A-1 is on SGX, I would definitely agree. The yield to maturity for Astrea IV is around 1.8% and the yield of Astrea V is around 2.5%. As such, I would expect the yield of Astrea VI Class A-1 bonds to compress to 2.5% after listing.
The 3% is a "more than fair" mark if you use City Development as a benchmark. Not withstanding all the noise surrounding its China investments, City Dev managed to issue a 5 year unrated senior bond at 2.3% this week. So yes, an A+ rated bond at 3% is definitely a "steal".
The Singapore Saving Bonds ("SSB") for March 2021 is shown below:
You can see that the "risk free rate" at year 5 is around 1.03%, so the Astrea VI Class A-1 bonds is offering a more than 2% pick up in yield if we also assume the 0.5% bonus interest will be paid.
Is it right for you to compare the interest to City Development or SSB ?
At the end of the day, a bond is a bond is a bond. As long as the Issuer pays me the agreed interest and repay me the principal, it is a "good bond". I would regard the Astrea bond series as more superior than corporate bond given its diversified nature (more than 800 underlying companies) and it is investment grade rated. Most corporate bonds here couldn't even qualify for a rating unless they have a "Temasek-halo".
How has previous Astrea bonds performed?
All prior series of Astrea bonds have met their obligations and most of them were upgraded over time. See press release
here.
While the bonus for Astrea IV and Astrea V have not been 'triggered' yet, based on the cashflows so far, I would expect them to be triggered between year 3.5 to year 4.5. While I did not invest in Astrea III, I understand from friends who did that the 0.3% bonus for Astrea III was paid at redemption in July 2019, so there is a track record of bonus interest being paid.
If you have been tracking the Astrea bonds, you would know that at the peak of Covid in June 2020, the Sponsors of Astrea IV and Astrea V waived their equity distributions for that period and redirected those cash flows into the Class A reserves account to de-lever the structure. You can find those reports on the Astrea or SGX websites.
It demonstrates very strong alignment of interest between the bond holder and the equity owners.
Who should or can subscribe for the Class A-1 bonds?
Investors who fall into the following categories are more suited for the Class A-1 bonds:
- risk adverse or conservative investors whose main investments are in fixed deposits
- investors who are keeping some spare cash rainy days or for future uses
- lazy investors who just want a piece of mind and have no use of cash for 5 years
- investors with too much cash and don't know what to do with them can allocate some to Astrea
- yield investors who wants to diversify away from single credit corporate bonds
Who should avoid the Class A-1 bonds?
Investors in the following categories may not be so suited:
- investors who are savvy and believe they can generate more than 3% anytime
- investors who are critical of Temasek all the time
- investors who believe they should receive PE returns because the bonds are backed by cash flows from a portfolio are PE funds
- investors who believe the interest rate is going to cheong up very soon
I struggled for a while to classify this - investors who want to flip the bonds fall into the first or second category above? 😆
What would be the IPO application strategy if I am keen?
It is quite funny I should even have this question. In most instances, I would say apply for as many as you can, but not for the Astrea PE bonds.
According to the gatefold in the prospectus, investors who wants to get something (guarantee plus chop) should apply for less than $50,000. Investors who prefer a larger allocation but with no certainty of allocation should apply $50,000 or more.
The first time this allocation policy came out in Astrea V, it took many by surprise. Now that the issuance is bigger this time at $250m (compared to $180m in Astrea V), it should hopefully be better for the Astrea fans.
Investors who opted for balloting has a 50% chance in Astrea V.
You can refer to the Astrea V balloting table
here.
What is Mr. IPO chilli ratings and views?
Regular readers know that I have built up a portfolio of SGD and USD bonds to generate passive income. I would 'challenge' you to find me a comparable investment grade SGD bond that pays me 3% per annum under current interest rate environment.
My wish list for retail investors is that they can get access to Class B bonds that is giving 4.35%. It used to be much higher interest in Astrea IV and Astrea V.
A moonshot wish list is that retail investors can get to invest in the equity tranche that Azalea is currently holding but it will be a different risk reward profile altogether and personally, I don't think regulators here would allow and investors may not understand 😂
For those of you holding tons of cash and not knowing where to put them, just HOOT lah. It's quite safe as one small covid sneeze, they rush to top up the reserves even though they don't need to.
It is better than cash sitting idle and earning close to nothing, so it is a 3 chilli rating if I compare the returns I can get from a fixed deposit or similar tenured corporate bonds.
Will you subscribe to Astrea VI Class A-1 Bonds?
It is polling time, you can participate in the poll
here.
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