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Introduction
The Astrea VI Class A-1 bond IPO is now open for subscription till 16 March (Tues, 12pm). Many investors have had a positive experience with Astrea IV and V, and I know of a few who have been eagerly awaiting the launch of Astrea VI as well.
In this article, we will be looking at Astrea VI in detail, and share our views if these PE Bonds are worth subscribing to…or not. Do note that retail investors may only subscribe to the Class A-1 bond.
We had also published a related article last month, with info about how the underlying risks of Astrea IV and V have changed since their respective IPOs (for the better…if you are wondering). We also explored if their yields are currently attractive relative to the underlying investment risk.
Article Summary
1) Astrea VI PE Bonds
2) Astrea VI “Class A-1” (SGD retail investor tranche)
3) Astrea VI “Class A-1” vs. SGD Corporate Bonds
4) How to subscribe to this IPO and key dates to note
Appendix
- Appendix 1: PE Bonds versus Corporate Bonds
- Appendix 2: How is Astrea linked to Temasek?
- Appendix 3: Summary of Astrea VI Bond Tranches
- Appendix 4: Comparing the Portfolios of PE Funds between Astrea IV, V and VI (at time of their respective IPOs)
- Appendix 5: How risky are Astrea VI bonds?
- Appendix 6: Astrea VI “Class A-2” vs. USD Corporate Bonds
- Appendix 7: Astrea VI “Class B” vs. USD Corporate Bonds
The InvestQuest View
The pricing for Astrea VI “Class A-1” retail bond looks very attractive in our view. The underlying credit risk is very low, given a conservative LTV and structural safeguards in place (not normally found in most corporate bonds). Moreover, the bond yields ~1% higher than comparable SGD Corporate Bonds.
1) Astrea VI PE Bonds
Astrea VI bond tranches
Note that retail investors can only buy the “Class A-1” Bond.
What you need to know
- PE versus Corporate Bonds. For a corporate bond, 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. Note that some types of expenses that would have priority over bond holders, which includes payments relating to taxes, hedge counterparties, manager fees and credit facilities. See Appendix 1, 3 and 4 for more details.
- How is Astrea linked to Temasek? Temasek Holdings is the indirect parent of Astrea. However, note that there is no recourse to Azalea or Temasek Holdings in the event of a default of Astrea PE bonds. See Appendix 2 for more details.
- How risky are Astrea VI bonds? In our opinion, the credit risk of Astrea VI is very low given the conservative Loan-to-Value (LTV) and various structural safeguards in place. See below for summarized list. See Appendix 5 for more details.
- LTV of Astrea VI & Historical PE Fund Returns: The US$643M of Astrea VI bonds will be backed by cash flows from a US$1.5B portfolio of mature PE Funds, implying a LTV of 44.2%. This means that the Astrea VI PE Fund portfolio would have to decline in value by 55.8%, before bondholders suffer a loss (upon the unlikely event of a liquidation scenario). In our view, it’s very unlikely.
- Structural Safeguard: Reserves Account. Astrea VI is mandated to set aside cash reserves of US$51.5M during each semi-annual coupon distribution date. The accumulated reserves will then be used to redeem the Class A-1 and Class A-2 bonds on the Scheduled Call Date. This reduces the probability of a bond default.
- Structural Safeguard: Sponsor Sharing. Complicated to summarize. Please see Appendix .
- Structural Safeguard: Max LTV Limit of 50% (over the life of the bond issue). In the event that the 50% LTV limit is exceeded, the sponsor will not be able to receive any cash for the time being. The residual cash generated from portfolio of PE Funds would have to be first channeled to the Reserves Account to lower the LTV below 50%.
- Structural Safeguard: Credit Facility from DBS. In the event of cash flow shortfalls, the credit facilities provided by DBS can be used to fund certain expenses such as bond coupons and PE Fund capital calls.
2) Astrea VI “Class A-1” (SGD retail investor tranche)
Retail investors are only allowed to subscribe to the Astrea VI “Class A-1” Bond, which is tradable on SGX upon listing. Details of the “Class A-1” bond may be found in the table below.
A few things to note for the “Class A-1” Bond:
- Of the S$382M issue size, S$250M will be raised from the general public and S$132M will be raised from institutional and accredited investors.
- Interest rate of 3% p.a., payable semi-annually.
- It is mandatory for Astrea VI to redeem the bond back on 18 Mar 2026, if the cash set aside is sufficient to redeem all Class A-1 Bond, and there are no outstanding Credit Facility loans.
- If the Class A-1 bond is not redeemed on 18 Mar 2026, its annual interest rate will step-up to 4% after this date.
- Class A-1 bondholders will get an additional 0.5% of their bond principal at redemption if the Sponsor, Astrea Capital VI, receives US$421 million (50% of Issuer’s equity) by 18 March 2026.
3) Astrea VI “Class A-1” vs. SGD Corporate Bonds
How risky is the Astrea VI “Class A-1” bond?
Earlier, we briefly covered the risk of Astrea VI bonds in general. For the “Class A-1” bond specifically, it’s actually less risky.
Firstly, the “Class A-1” bond is rated “A+” by Fitch and “A+” by S&P. For context, bonds with “A+” ratings by S&P include Coca-Cola, 3M, Mastercard, Alibaba, Intel, Toyota.
Secondly, “Class A-1” and “Class A-2” bonds rank equally within the capital structure, but are senior to “Class B” bonds. In a corporate liquidation, “Class A-1” and “Class 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.
The face value of “Class A-1” and “Class A-2” bonds would total US$513M, which implies a Loan-to-Value of 35.3% (see chart above).
This means that the Astrea VI PE Fund portfolio would have to decline in value by 64.7%, wiping out the equity (red layer) and the “Class B” bond (orange layer), before “Class A-1” and “Class A-2” bondholders suffer a loss during a corporate liquidation.
Yields of Astrea VI “Class A-1” bond vs SGD Corp Bonds
To determine if Astrea VI “Class A-1” bond is offering good value, we have to compare its yield to similarly rated SGD Corporate Bonds that are maturing in 2026. 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 i.e. better value for investors at this point in time.
Astrea VI’s “Class A-1” bond is the red dot, while Astrea V‘s and Astrea IV‘s are in grey. As you can see, Astrea VI’s “Class A-1” bond is significantly above the blue dotted line!
On this basis, we believe that the Astrea VI “Class A-1” retail bond offers good value, with yields that are about 1% higher than comparable SGD bonds. Details of the SGD bonds used as comparables may be found in the table below.
4) How to subscribe to this IPO and key dates to note
To subscribe to the Astrea VI “Class A-1” retail offering, do take note the below dates!
Application can be done via ATM, Internet Banking Account or Mobile Banking, with a minimum application size of S$2,000.
How much allocation should you expect to receive?
While it is subject to change, Astrea VI plans to allocate valid applications as follows:
- Application size below S$50,000: Guaranteed to get an allocation (allocation amount may be in full or in part)
- Application size of S$50,000 and above: Not guaranteed to get an allocation (allocation amount may be in full or in part)
We have included the IPO allocation results for the “Class A-1” bond of Astrea IV and V below, which took place in 2018 and 2019 respectively. Hopefully this helps to manage your allocation expectations and gives a sense of how much you should apply for.
The InvestQuest View
The pricing for Astrea VI “Class A-1” retail bond looks very attractive in our view. The underlying credit risk is very low, given a conservative LTV and structural safeguards in place (that is not found in most corporate bonds). Moreover, the bond yields ~1% higher than comparable SGD Corporate Bonds.
Appendix 1: 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.
Astrea has also made a video, explaining what is Private Equity and PE Bonds.
Astrea has also made a separate video, relating to the Astrea VI Class A-1 Bond in particular.
Appendix 2: 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.
Appendix 3: Summary of Astrea VI bond tranches
For Astrea VI, US$643M of bonds will be issued across three tranches. Details of the three bond tranches may be found in the table below.
The Astrea VI bonds will be backed by cash flows from a US$1.5B portfolio of mature PE Funds. When cash is distributed from the mature PE Funds to Astrea, Astrea uses the cash to pay various payments, including the bond coupons and eventually the bond principal.
The below image shows the types of expenses that would have priority over bond repayments (clause 1 to 4), which includes payments relating to taxes, hedge counterparties, manager fees and credit facilities.
Appendix 4: Comparing the Portfolios of PE Funds between Astrea IV, V and VI (at time of their respective IPOs)
Astrea VI seems to have marginally lower credit risk compared to Astrea V and Astrea V, at the point of their respective IPOs.
Firstly, the gearing ratio for Astrea VI is slightly lower at 44.2%, compared to 45.6% for Astrea IV and 45.3% for Astrea V.
Secondly, it is common for PE Funds to mark-to-market their assets on a quarterly basis, and published with a 6-month lag. For the purposes of the Astrea VI bond IPO, the NAV of the underlying portfolio of PE Funds is as of 30 Sep 2020. In our view, given the sharp rally across risk assets since then, the “current” valuation of Astrea VI’s portfolio of PE Funds could possibly be higher. If that’s true, it would imply that Astrea VI’s gearing ratio is slightly overstated currently, which is positive for bond investors.
Appendix 5: How risky are Astrea VI bonds?
To determine this, we consider a few factors.
- Loan-to-Value of Astrea VI (at IPO date) & Historical PE Fund Returns
- Structural Safeguard: Reserves Account
- Structural Safeguard: Sponsor Sharing
- Structural Safeguard: Max Loan-to-Value Limit of 50% (during the life of the bond)
- Structural Safeguard: Credit Facility from DBS
1) Loan-to-Value of Astrea VI (at IPO date) & Historical PE Fund Returns
The US$643M of Astrea VI bonds will be backed by cash flows from a US$1.5B portfolio of mature PE Funds, implying a loan-to-value of 44.2%. This means that the Astrea VI PE Fund portfolio would have to decline in value by 55.8%, before bondholders suffer a loss (upon the unlikely event of a liquidation scenario).
How likely is it for a diversified PE Fund portfolio to fall by 55.8% in value? In our view, it’s very unlikely. In the past two decades:
- The median-performing PE Fund has been very consistent in achieving high single-digit to mid-teen net IRRs (see grey line in below chart).
- In addition, 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 below chart). For Astrea VI, the risk should be even lower, as its PE Fund portfolio would be diversified across vintage years, geographies, investment strategies and managers as well.
2) Structural Safeguard: Reserves Account
Similar to the concept of a sinking fund, Astrea VI is mandated to set aside cash reserves of US$51.5M during each semi-annual coupon distribution date. 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 126 of the Astrea VI Prospectus.
3) Structural Safeguard: Sponsor Sharing
When Astrea VI’s portfolio 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
- 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 VI’s Class A-1 and A-2 Bonds on the Scheduled Call Date.
4) Structural Safeguard: Max LTV limit of 50% (during the life of the bond)
Using an analogy to explain what Loan-to-Value (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 VI 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 VI would only be able to borrow $0.50, leaving a relatively safe buffer for bond investors.
We show a breakdown of Astrea VI’s capital structure in the chart below.
- Astrea VI is holding a portfolio of PE Funds valued at US$1.5B
- Astrea VI is issuing three tranches of bonds to raise US$643M (44.2% of US$1.5B).
- The remaining US$841M is comprised of equity.
The portfolio of PE Funds would have to decline in value by 55.8% (i.e. Astrea’s equity layer of US$841M), before bond holders suffer a loss.
In the event that the 50% LTV limit is exceeded, the sponsor will not be able to receive any cash for the time being. The residual cash generated from portfolio of PE Funds would have to be first channeled to the Reserves Accountto lower the LTV below 50%.
For more details, you may refer to page 128 of the Astrea VI Prospectus.
5) Structural Safeguard: Credit Facility from DBS
In the event of cash flow shortfalls, the credit facilities provided by DBS can be used to fund certain expenses such as bond coupons and capital calls.
Similar credit facilities are available for Astrea IV and V. To date, none of these facilities have been utilized.
It’s fair to say that overall, the credit risk of Astrea VI is very low, given the conservative LTV and various structural safeguards in place.
Appendix 6: Astrea VI “Class A-2” vs. USD Corporate Bonds
Astrea VI’s “Class A-2” and “Class B” bonds are only made available for accredited and institutional investors. To qualify as an accredited investor, you would need to meet at least 1 of the following 3 criteria:
- At least S$300,000 income in the preceding 12 months
- Net personal assets exceeding S$2 million, of which the net value of the investor’s primary residence can only contribute up to S$1 million
- Net Financial Assets exceeding S$1 million
For Astrea VI’s “Class A-2 Bond”, we have included its key investment terms in the table above.
We compared its yield to similarly rated USD Corporate Bonds that are maturing in 2026. 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.
On this basis, we believe that the Astrea VI “Class A-2” bond offers good value, with yields that are about 1.5% higher than comparable rated USD corporate bonds. Details of the USD bonds used as comparables may be found in the table below.
Appendix 7: Astrea VI “Class B” vs. USD Corporate Bonds
For Astrea VI’s “Class B Bond”, we have included its key investment terms in the table above.
We compared its yield to similarly rated USD Corporate Bonds that are maturing in 2031. 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.
On this basis, we believe that the Astrea VI “Class B” bond offers good value, with yields that are about 1.2% higher than comparable rated USD corporate bonds. Details of the USD bonds used as comparables may be found in the table below.
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