Astrea 7 Class A-1 and Class B PE Bonds

How time flies! 

From Astrea IV in 2018 to Astrea 7 in 2022, 4 Astreas in 5 years. I was just digging through my archive and for old times' sake:

• Astrea IV Class A-1 Public Offer of S$121m at 4.35% to be redeemed on 14 June 2023

• Astrea V Class A-1 Public Offer of S$180m at 3.85% to be redeemed on 20 June 2024

• Astrea VI Class A-1 Public Offer of S$250m at 3% to be redeemed on 18 March 2026

What is different this time ?

In addition to Class A-1 bonds, you can subscribe to Class B bonds (USD) for the first time, more aptly described by PEI's "Temasek's Azalea enables retail investors to climb risk-return ladder".  

In other words, you can subscribe for either Class A-1 or Class B or you can subscribe for both. 

What are the Class A-1 Bonds? 

Public Offer of S$280m at 4.125% to be redeemed on 27 May 2027

Class A-1 Bonds are rated A+ by both S&P and Fitch. They are denominated in SGD, and pay a coupon of 4.125% per annum semi-annually. It has a fixed 5 year term and will be redeemed on 27 May 2027. 

What are the Class B Bonds? 

Public Offer of US$100m to be redeemed on 27 May 2028

Class B bonds are rated BBB+ (still investment grade) and have a 6 year term and are ranked junior to the Class A bonds. It pays an interest of 6% every 6 months.

Given that we are now into Astrea 7, let me just summarize the key questions which investors are keen to know in very layman terms and where possible, use the graphics in the gatefold or information on the Issuer's website. 

What are Astrea 7 PE bonds? 

Just click on the picture below to watch the video :

In a nutshell, you are lending money to the Issuer against a portfolio of 38 PE Funds worth US$1.9b. Every 6 months, the cash that is received by Astrea 7 from these PE funds will flow through a waterfall (see below) from which you will receive your interest payment. 

Money will also be set aside in the Reserves Account in equal installments for Class A bonds for the first 5 years and then swept into the Reserves Account for Class B bonds from end of year 5 onwards to repay the Class B bonds at end of year 6. (Note the sequential reserve mechanism for Class A and Class B bonds).

What is the leverage level of Astrea 7 at issuance ?

The LTV at issuance is 39.6%. In Astrea VI, the LTV was 44.2% As you can tell from the picture below, Class A-1 is pretty safe at around 20% LTV while Class B is the most junior tranche. Having said that, what is more important is that the Equity comprises 60% of the LTV. In other words, similar to prior Astrea transactions, there is a strong alignment of interest as the equity owner (or the Sponsor) holds the bulk of the capital stack and in this instance, 60% of the NAV.

How is the quality of the portfolio backing the PE bonds?

According to the prospectus, the portfolio is focused in the US and Europe (82%) with a weighted average age of 5.3 years. Usually PE portfolios of between 5 to 7 years are the most cash flow generative as the initial years (first 4 to 5 years) are for investing and the later years for harvesting (years 6 to 10). In addition, there are 982 underlying companies in the portfolio and this is even more than the 802 companies in Astrea VI.

I have to admit that it will be tough for me to opine on the quality of the PE portfolio but I managed to dig out something from Fitch's report below. Granted that past performance is not indicative of future performance, the comfort you can take away is that the managers in the Astrea 7 are highly experienced with long track records. Many of them had funds of early vintages in prior Astrea programmes and have done well.

 

"The portfolio consists of U.S., European and Asian funds, managed primarily by large GPs with established track records. Fitch reviewed each fund and GP in the portfolio using quantitative and qualitative metrics, including reviewing the GP's history, resources, capital-raising success, and previous fund performance based on information available publicly, from third-party data providers and from the sponsor. Overall, the funds in the portfolio have exhibited good performance. As shown in the charts below, the GPs in the Astrea 7 portfolio tend to be very large, with extensive experience and success raising capital in recent years, which indicates investors' confidence. The funds also tend to be large, and most are subsequent iterations of established strategies. Based on this review of the funds and GPs, Fitch determined that no performance-based haircuts were required beyond the base case scenario analysis in accordance with Fitch's rating criteria." - Fitch

What would be the "biggest risk" that stops me from buying the bonds and is the risk "mitigated"? 

The biggest risk to me would be that after buying the bonds, the NAV of the portfolio "crashed" and the managers were unable to sell those 982 companies or have to sell them at a lower carry value. In other words, the distributions are lower than anticipated. If you look at how the stock markets have been performing over the last 6 months, it is definitely not very encouraging given that one of the exit routes for these companies is through the public markets and there is currently a disconnect between the valuations in the private and public markets. 

You can see a "perfect storm" looming in front of you whereby the global economies are entering into a recession due to escalating war, supply chain problems, covid-zero policies, inflation, rising interest rate and trade tensions, resulting in bear markets and declining growth.  Is there any hope for bond holders in this "perfect storm" which potentially might turn into another Global Financial Crisis in 2008?

The mitigants in my mind will be the following:

1. Kick the can down the road - if you look at page A1-13, there is a cash of $39m sitting on the balance sheet. Considering that cash continues to accumulate from Jan till May, there is probably enough cash for the first distribution period
2. Post the first period, there is a credit facility that can be drawn to pay bond holders interest. In other words, DBS will step in and pay you interest if there is no cash flow from the underlying funds. Let DBS "tong" the interest rate for a while as the credit facility seemed to be well sized
3.  Extensive modelling done on averse scenarios provides added comfort that you can have the cake and eat it. There are scenario analysis done by Issuer, Bella and Fitch and all of them indicate that you can get repaid eventually and be compensated with a 1% step up in interest rate if you are not redeemed  

Will I buy Class A-1 Bonds?

From the S&P report, you should just buy it. It's a AAA rated bond disguised as a "A rated" bond. Not many bonds are rated AAA (sf) (not to mention not many countries are rated AAA). 

If you look at the alternatives, the closest in my mind for retail investors would be the fixed deposits, the Singapore Savings Bonds or the un-rated retail bonds (limited in issuance). In other words, not many alternatives are available to retail investors.

If you look at the June SSB issuance details here, you will see that the average yield is 2.37%. The yield pick up at 4.125% is actually not too bad, provided you have no need for the cash for the next 5 years. If you do plan to use the cash in the foreseeable future, the SSB may be a better option as you can sell it at any time and not be subject to price movements or lack of liquidity.

Will I buy Class B bonds - a picture tells a thousand words

It is good to Azalea taking a phased approach in the distribution to retail investors. It started with the safer Astrea IV Class A-1 in SGD in 2018 and after 4 years, having built up the necessary "track record", allows retail investors to participate in the Astrea 7 Class B tranche. 

If you read the Fitch report, they have a rating cap at 'A+sf' for PE CFO transactions, "driven by the less proven nature of the PE CFO asset class relative to other structured finance asset classes, the uncertainty related to investment performance and the timing of cash flows, the variability of asset valuations and lags in performance reporting."

My RM forwarded me the Netroadshow link and I thought this chart able to illustrate its prior track record. You can see that the Class B bonds get upgraded over time from Astrea III to Astrea VI. In my mind, I thought that the Class B bonds presented a better "risk-versus-reward" option than Class A-1. If all else being equal in that the bonds don't default, then Class B would be a better "value" at 6% per annum. Having said that, Class B is denominated in USD, thus you have to see if you are happy getting some USD exposure.

Relative to other BBB rated bonds, the 6 year Astrea Class B bonds at 6% definitely look attractive. Not many investment grade bonds pay a 6% coupon, so this is a giveaway to me. For retail investors, while this is NOT a Temasek credit, it is attractively priced and even under volatile markets, I understand there were good demand for the bonds. Similar to Class A-1, I think most investors will be "buy-and-hold", so if you need cash in the next few years, you may not want to invest in it.

How to apply? Can I apply for both? Application Strategy

Now that we have established that Class A-1 and Class B bonds are relatively safe, the question is how to apply? 

Consistent with prior Astreas, if you apply for less than S$50,000 or US$50,000 you will get something for sure. If you apply 50,000 or more, then you will be subject to balloting, which may not be a bad thing. You can apply for Class A-1 or Class B or both. Given that Class B is offered in USD, the forex rate is already fixed at 1.3866. In other words, if you apply for 30,000 Class B bonds and were allotted 8,000, you will pay for the 8,000 Class B Bonds at the fixed rate of 1.3866 and the balance 22,000 will be refunded to you at the same exchange rate (i.e. no forex risk on the unsuccessful portion). 

Investors should note that if you buy the Class B bonds, unless you "opt out" from CDP, you will receive the interest in SGD at the prevailing market rate at each distribution as well as the final principal amount is SGD. The way to circumvent this is to "transfer" the Class B bonds and custodise it with a brokerage or private bank that allows you to receive the interest and eventual principal in USD. However, that might make sense only if you have use for the USD, want to time your forex and don't need to pay any custody fees.

Who should not be applying for the bonds ?

Maybe it is easier to list down who should not be buying the Astrea PE Bonds.

• Investors who are not the buy-and-hold type. The secondary liquidity can be limited and in a rising interest rate environment, you may have to sell the bonds below par
• Investors who intends to use the cash to invest in stocks in the coming years if there are bargains in the stock market (almost the same as the first reason) or have other use of the cash in the foreseeable future
• Investors who does not want any exposure to USD should not apply for the Class B Bonds
• Investors who are super risk averse

Mr IPO Chilli Ratings

This is a bond issuance, not an equity IPO, so the chilli ratings don't apply since you are not supposed to "flip" it. 

Compared to Astrea VI, the interest rate for Class A-1 and Class B has risen to a level that it is at least "more interesting". I would give both a 3 chilli ratings for the risk and reward considering the lack of alternatives which retail investors have in the market. I understand from my DBS RM that there were strong demand and many investors were not allocated in full.

For me - I will be applying for both Class A-1 and Class B bonds and I prefer to be balloted.  

Will you subscribe for Astrea 7 PE bonds?

Time for the poll again!