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We’ve published an article on the Astrea VI IPO!
Introduction
Astrea Investor Day 2021 was held on 28 January 2021 (click here for the recording).
For investors who are new to Astrea bonds, we will evaluate if Astrea bonds are an investment worth considering, after evaluating the risks involved and the yields of comparable rated SGD corporate bonds.
For investors who currently hold Astrea bonds, we will update on the Astrea IV and V portfolios and highlight what has changed since the bonds were issued.
Article Summary
1) What are Astrea Private Equity (PE) Bonds?
- Difference between PE Bonds vs Corporate Bonds
- How Astrea is linked to Temasek
- Summary of bond tranches for Astrea IV and V
2) Why we view Astrea PE bonds as very low-risk investments
- A diversified PE portfolio offers consistent returns, with manageable downside risk
- Structural Safeguard 1: Reserves Account
- Structural Safeguard 2: Sponsor Sharing
- Structural Safeguard 3: Maximum Loan-to-Value (LTV) of 50%
- Structural Safeguard 4: Credit Facility
- Sponsor is proactive in safeguarding bondholders’ interests
3) Is it worth buying Astrea retail bonds now?
Appendix 1: Update on Astrea IV
Appendix 2: Update on Astrea V
The InvestQuest View:
We see very strong fundamentals supporting Astrea IV and V
- Firstly, long-term historical returns for Private Equity Funds (the assets backing Astrea) have been relatively consistent. Downside risk has also been manageable, as bottom-quartile PE Funds have still managed to achieve positive net IRRs in the past two decades.
- Secondly, multiple structural safeguards are in place to ensure that the Astrea’s bond obligations are met.
- Thirdly, leverage levels have decreased, with current debt ratios of both Astrea IV and V now at 32.8% and 32.7% respectively (compared to 45.6% and 45.3% during IPO).
- Lastly, we like that Azalea decided to safeguard bondholders during the peak of the Covid-19 crisis last year, by voluntarily topping up US$53M and US$12M to the Reserves Accounts of Astrea IV and V respectively (using funds that was contractually due to Azalea as the equity tranche sponsor).
Bond valuations of Astrea IV and V look attractive relative to its credit risk. Despite improving credit fundamentals, Astrea IV and V retail bonds are still yielding ~1% higher than comparable SGD Corporate Bonds, possibly because investors are less familiar with PE bonds and hence demand a higher yield to compensate for this uncertainty.
Important to Note: While Temasek Holdings is the indirect parent of Astrea, note that there is no recourse to Azalea or Temasek Holdings in the event of a default of Astrea PE bonds.
1) What are Astrea PE Bonds?
PE Bonds vs Corporate Bonds
For a corporate bond, capital raised is typically used to fund business operations. Repayment of bond obligations is backed by cashflows generated by the business and any additional profits will go to the shareholders of the company.
In contrast, for the Astrea PE Bonds, the repayment of bond obligations is backed by the cashflows generated by a portfolio of mature PE Funds, which each Astrea PE Bonds issuer has stakes in. Each PE Fund is invested in a portfolio of private companies, and when these private companies pay a dividend or are sold by the PE Fund, cash received by the PE Fund is distributed to its investors such as the Astrea PE Bonds issuer. The issuer then uses these cashflows to pay its bond obligations. The flow chart below illustrates this simply, using Astrea V as an example.
Astrea has also made a video, explaining what is Private Equity and PE Bonds.
How is Astrea linked to Temasek?
In very simplified terms, the below chart shows Astrea’s relationship with Temasek.
While Temasek Holdings is the indirect parent of Astrea, note that there is no recourse to Azalea or Temasek Holdings in the event of a default of Astrea PE bonds.
- Each Astrea is a corporate entity that issues PE bonds. Each Astrea is an indirect wholly-owned subsidiary of Azalea, which in turn is an indirect wholly-owned subsidiary of Temasek Holdings.
- Azalea is an investor in PE Funds, and develops and manages innovative new investment products to make private equity accessible to a broader group of investors. The Astrea Platform is one such innovation that allows retail investors in Singapore to gain exposure to Private Equity through Astrea PE Bonds.
Despite the very strong corporate parentage, investors in Astrea’s PE bond should note that the credit risk lies with each Astrea (and backed by cashflows from a specific portfolio of PE Funds which is identified at launch), and not Azalea or Temasek Holdings.
Astrea IV’s Bond Tranches
Astrea IV has issued 3 classes of bonds . We include the key details of each of them below. Do note that only S$121M of Class A-1 bonds are available to retail investors.
Astrea V’s Bond Tranches
Astrea V has issued 3 classes of bonds. We include the key details of each of them below. Do note that only S$180M of Class A-1 bonds are available to retail investors.
2) Why we view Astrea PE bonds as extremely low-risk investments
Astrea IV & Astrea V PE Bonds are backed by cash flows generated from specific portfolios of Private Equity Funds. While Private Equity is often perceived as a higher risk asset, we believe that the credit risk of the Astrea IV and Astrea V Bonds is actually very low, due to the diversification of underlying PE Funds and their portfolio companies, as well as the various structural safeguards in place to ensure that Astrea’s bond obligations are met. We expound on our reasoning below.
A diversified PE portfolio offers consistent returns, with manageable downside risk
Looking at Private Equity returns by Vintage Year (see chart below, global data), we observe that the median-performing PE Fund has been very consistent in achieving high single-digit to mid-teen net IRRs (see grey line).
In addition to the attractive return profile, the downside risk has also been manageable. In almost all vintage years since 2000, bottom-quartile PE Funds still managed to achieve positive net IRRs (see orange line in above chart).
These results are similar to statistics mentioned by Margaret Lui (CEO of Azalea), during Astrea Investor Day 2021. She mentioned that historically, portfolios of mature PE funds have demonstrated lower risk of loss – only 2.3% such portfolios experienced a loss. Of the loss-making mature funds, the worst-performing fund experienced a 17% loss. These statistics were compiled by Preqin, using Secondary Fund of Funds data.
We are further comforted by the fact that Astrea IV and V’s underlying PE Fund portfolio is extremely diversified, holding 36 and 38 PE Funds respectively (during their respective launch dates), providing exposure across multiple regions, sectors, fund vintage years and investment strategies.
Structural Safeguard 1: Reserves Account
Similar to the concept of a sinking fund, each Astrea is mandated to set aside cash reserves during each coupon distribution date in the first five years after bond issuance. The accumulated reserves will then be used to redeem the Class A-1 and Class A-2 bonds on the Scheduled Call Date (five years after the bond’s issue date).
Such a structure adds an element of security for bondholders, by lowering the bond’s default risk. In contrast, a vast majority of unsecured corporate bonds do not have this safeguard in place.
For more details, you may refer to page 114 of the Astrea IV Prospectus, and page 130 of the Astrea V Prospectus.
Structural Safeguard 2: Sponsor Sharing
When Astrea IV’s & V’s portfolios of Private Equity Funds generate cash, this cash first goes towards paying higher priority payments such as management fees, taxes, Astrea bond coupons and reserves.
Typically, it is quite common for a sponsor (Azalea in this case) to be entitled to the full 100% of residual cash flows.
However, Astrea has implemented a structural safeguard. The clause is quite atypical and favours bondholders.
How it works: When this residual cash flow accumulates to above a pre-determined amount,
- Sponsor shares 50% of this residual cash flow with the Reserves Account (mentioned earlier)…
- and keeps the other 50% of the residual cash flow
- This contribution to the Reserves Account will take place until the Reserves Account Cap is met (i.e. the principal amount of all Class A bonds has been set aside in the Reserves Account).
The purpose of this measure is to support a faster build-up of reserves to facilitate the redemption of Astrea IV & Astrea V’s Class A-1 and A-2 Bonds on the Scheduled Call Date.
Structural Safeguard 3: Maximum Loan-to-Value (LTV) of 50%
Using an analogy to explain what LTV is, imagine that you purchased your first home in Singapore and took a bank loan. You are required to put a minimum downpayment of 25% of the property’s value, and the bank lends you the remaining 75%. This means that the maximum LTV is 75%.
In the case of Astrea IV and V Bonds, the maximum LTV is set at a more stringent level of 50%. This means that if the respective portfolios of PE Funds are valued at $1, Astrea IV and V would only be able to borrow $0.50 each, leaving a relatively safe buffer for bond investors.
We show a breakdown of Astrea’s IV’s capital structure at IPO vs now, in the chart below. From here, we are able to illustrate how the credit risk has declined substantially since the Astrea IV bonds were issued in June 2018.
- At the time of bond issuance, Astrea IV was holding a portfolio of PE Funds valued at US$1,098M (left column in below chart)
- Astrea IV had issued three tranches of bonds to raise US$501M (45.6% of US$1,098M).
- The remaining US$597M comprised of Astrea’s equity.
- The portfolio of PE Funds would have to decline in value by 54.4% (i.e. Astrea’s equity of US$597M), before bond holders suffer a loss.
- Currently, Astrea IV’s portfolio of PE Funds is valued at US$762M (right column in below chart). The decline in portfolio value is to be expected since the portfolio is relatively mature and has been making cash distributions to Astrea.
- The principal of the outstanding bonds is US$504M (of which US$254M has already been accumulated in a Reserve Account, meant for redeeming these bonds subsequently)
- As such, Astrea IV’s net debt is US$250M, 32.8% of Astrea IV’s US$762M portfolio NAV.
- The portfolio of PE Funds would have to decline in value by 67.2% before bond holders suffer a loss.
We show a similar illustration for Astrea V (see chart below).
- At the time of bond issuance, Astrea V was holding a portfolio of PE Funds that was valued at US$1,324M (left column in chart below).
- Astrea V had issued three tranches of bonds, raising US$600M of capital (45.3% of US$1,324M).
- The remaining US$724M comprised of Astrea’s equity.
- The portfolio of PE Funds would have to decline in value by 54.7% (i.e. US$724M of Astrea’s equity), before bond holders suffer a loss.
- Currently, Astrea IV’s portfolio of PE Funds is valued at US$1,382M (right column in chart below).
- The principal of the outstanding bonds is S$605M (of which US$153M has already been accumulated in a Reserve Account, meant for redeeming these bonds subsequently).
- This means that Astrea V’s net debt is US$452M, 32.7% of Astrea V’s US$1,382M portfolio NAV.
- The portfolio of PE Funds would have to decline in value by 67.3% before bond holders suffer a loss.
Note: Class A-1 and Class A-2 bonds rank equally within the capital structure, and are senior to Class B bonds. Hence in a corporate liquidation, Class A-1 and A-2 bondholders are less risky, as the Class B bonds act as an additional layer of buffer in the event that the layer of equity is wiped out.
Structural Safeguard 4: Credit facility
In the event of cash flow shortfalls, the credit facilities provided by DBS (for Astrea IV and V) and Standard Chartered Bank (for Astrea V only) can be used to fund certain expenses such as bond coupons and Capital Calls. To date, none of these facilities have been utilized.
Sponsor is proactive in safeguarding bondholders’ interests
Azalea decided to safeguard bondholders during the peak of the Covid-19 crisis last year, by voluntarily topping up US$53M and US$12M to the Reserves Accounts of Astrea IV and V respectively (using funds that was contractually due to Azalea as the equity tranche sponsor). This indicates a strong commitment to ensuring that leverage levels are kept in check and that sufficient capital continues to accumulate in the Reserves Account to redeem the Class A-1 and A-2 bonds on their Scheduled Call Dates.
3) Is it worth buying Astrea retail bonds now?
Only Astrea IV’s and Astrea V’s “Class A-1 bonds” are available to retail investors, which is what we will focus on. Here are the main details of the bonds and we will go through them in detail.
What is the Credit Rating of Astrea retail bonds?
- Astrea IV 4.35% Class A-1 is rated “A+” by Fitch and “A” by S&P.
- Astrea V 3.85% Class A-1 is rated “A” by Fitch and “A+” by S&P.
These ratings imply very low credit risk.
- For context, bonds with “A+” ratings by S&P include Coca-Cola, 3M, Mastercard, Alibaba, Intel, Toyota.
- Bonds with “A” ratings by S&P include Oracle, IBM, Caterpillar, Honeywell, GSK, Home Depot.
In addition, Astrea IV and Astrea V have issued bonds that are junior to its Class A-1 bonds. This means should Astrea IV or Astrea V default, their respective equity layers are wiped out first, followed by the Class B bonds, before the Class A-1 bondholders face any losses. You may refer to the earlier section on Astrea’s structural safeguards for more details.
When should investors expect the Astrea bond principal to be paid back?
The Scheduled Call Dates for Astrea IV 4.35% Class A-1 and Astrea V 3.85% Class A-1 bonds are 14 June 2023 and 20 June 2024 respectively. If the cash set aside is sufficient to redeem all Class A-1 Bonds and there are no outstanding credit facility loans, the bonds have to be redeemed on these dates.
If the conditions are not met and the bonds are not redeemed then, the coupon rate of the bonds will be increased by 1%. The bonds would then be callable every six months thereafter, and will have to be redeemed once the above-mentioned two conditions are met.
For the moment, it is very likely that the bonds will be redeemed at the Scheduled Call Dates. Of course, investors may also choose to sell the bond on SGX, before these dates.
What is the Expected Yield of Astrea retail bonds?
Astrea’s retail bond yields are highlighted in the table below in orange, 1.95% (for Astrea IV) and 2.67% (for Astrea V). While not high in absolute terms, we note that the credit risk of the Astrea bonds is very low given its structural safeguards (mentioned in Section 2), and the bonds are offering a meaningfully higher yield than 10-year Singapore Government Bonds (which yields just 1%).
Note: If a “Performance Threshold” is met, Class A-1 bondholders would be entitled to redemption bonus of 0.5% of the bond principal. This has not been factored into the above-mentioned yields.
How Attractive are Astrea bonds?
To determine if these Astrea bonds are offering good value, we have to compare its yield to similarly rated SGD Corporate Bonds that are maturing in 2023-2024. We illustrate this in the chart below – the bond yield is represented by the left-axis, while the bond maturity is represented on the bottom-axis. All else equal, for the same bond duration, an investor would prefer bonds with higher yields – this means bonds above the blue dotted line are generally more attractive.
On this basis, we believe that Astrea IV and V retail bonds offer good value, with yields that are about 1% higher than comparable SGD bonds.
Details of the comparable SGD bonds used in the above chart may be found in the table below.
Appendix 1: Update on Astrea IV
As a result of the pandemic, many investors might have had concerns about Astrea IV’s underlying PE exposure. Fortunately, the adverse impact on the PE portfolio value was temporary and it has since appreciated above pre-Covid levels. Astrea IV’s PE portfolio value was US$1.098bn when Astrea IV bonds were issued in 2018, which has grown to US$1.306bn (including net distributions received), as of the latest disclosure.
In the below table, we list down the changes to Astrea IV’s portfolio since the bond IPO in June 2018. We highlight the key ones here:
- PE portfolio value has appreciated 18.9%, from US$1,098.4M to US$1,306M (including net distributions received)
- Leverage ratio has declined from 45.6% to 32.8%. This factors in the voluntary US$53M top up to the reserve account in 2020, using funds that was contractually due to Astrea as the equity tranche sponsor.
- Fitch upgraded the Class A-1 bond’s credit rating by one notch, from “A” to “A+”
Appendix 2: Update on Astrea V
Astrea V’s PE portfolio value has seen a strong rebound in 2H2020 and has appreciated above pre-Covid levels. Astrea V’s PE portfolio value was US$1.324bn when Astrea IV bonds were issued in 2019, which has grown to US$1.741bn (including net distributions received), as of the latest disclosure.
In the below table, we list down the changes to Astrea V’s portfolio since the bond IPO in June 2019. We highlight the key ones here:
- PE portfolio value has appreciated 31.5%, from US$1,324M to US$1,741M (including net distributions received)
- Leverage ratio has declined from 45.3% to 32.7%. This factors in the voluntary US$12M top up to the reserve account in 2020, using funds that was contractually due to Astrea as the equity tranche sponsor.
The InvestQuest View:
We see very strong fundamentals supporting Astrea IV and V
- Firstly, long-term historical returns for Private Equity Funds (the assets backing Astrea) have been relatively consistent. Downside risk has also been manageable, as bottom-quartile PE Funds have still managed to achieve positive net IRRs in the past two decades.
- Secondly, multiple structural safeguards are in place to ensure that the Astrea’s bond obligations are met.
- Thirdly, leverage levels have decreased, with current debt ratios of both Astrea IV and V now at 32.8% and 32.7% respectively (compared to 45.6% and 45.3% during IPO).
- Lastly, we like that Azalea decided to safeguard bondholders during the peak of the Covid-19 crisis last year, by voluntarily topping up US$53M and US$12M to the reserve accounts of Astrea IV and V respectively (using funds that was contractually due to Azalea as the equity tranche sponsor).
Bond valuations of Astrea IV and V look attractive relative to its credit risk. Despite improving credit fundamentals, Astrea IV and V retail bonds are still yielding ~1% higher than comparable SGD Corporate Bonds, possibly because investors are less familiar with PE bonds and hence demand a higher yield to compensate for this uncertainty.
Important to Note: While Temasek Holdings is the indirect parent of Astrea, note that there is no recourse to Azalea or Temasek Holdings in the event of a default of Astrea PE bonds.
Disclaimer: This article has not been reviewed by the Monetary Authority of Singapore.
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