Are Astrea 8 bonds worth buying?

Summary

• Offer of Astrea 8 PE bonds: Astrea 8 has launched a public offer of S$260 million of Class A-1 Bonds at a fixed interest rate of 4.35% per annum, and US$50 million of Class A-2 bonds at a fixed interest rate of 6.35% per annum. Astrea 8 is backed by cash flows from a portfolio of 38 private equity funds that invested in 1,028 companies across diversified industries and geographies. The portfolio is valued at US$1,471 million as at end-2023. The manager of Astrea 8 Pte Ltd is Azalea, a 100%-owned subsidiary of Temasek Holdings Pte Ltd.

• Proven issuer track record. The bonds will mature in 15 years in July 2039. The Class A-1 and Class A-2 bonds are callable at the 5th and 6th year, respectively. There will be a one-time interest step up of 1% per annum if these are not redeemed at the call date. We note that the Astrea III and IV were redeemed before their maturity dates. While the bonds are not guaranteed by any party, there are structural safeguards such as the reserves accounts mechanism, maximum loan-to-value (LTV) ratio of 40%, and credit facility if cash flow shortfall occurs. 

• Decent yield compared to existing Astrea issues. The yield to call of the Class A-1 bonds of 4.35% is above the range of 3.44% to 3.57% for existing Astrea S$ issues. The yield to call of 6.35% for Class A-2 bonds falls within the range of 4.62% and 6.61% for existing US$-denominated Astrea issues. However, the Astrea 8 PE bonds have a longer duration compared to previously issued bonds. 

• We believe Astrea 8 bonds may be attractive for investors seeking regular income for a longer duration, given the track record of past Astrea series and safeguards in place. We prefer Class A-1 bonds due to the yield premium compared with existing Astrea S$ series. Key risks include liquidity risk, leverage risk, exchange rate risk for Class A-2 bondholders, amongst others.

   

Offer of Astrea 8 PE bonds

Astrea 8 PE bonds (PE Bonds) are secured fixed-rate debt issued by Astrea 8 Pte Ltd. (Astrea 8). 

There are two classes of bonds issued:

• Class A-1 Bonds of S$520 million at 4.35% annual interest rate; 

• Class A-2 Bonds of US$200 million at 6.35% annual interest rate. 

• S$260 million of Class A-1 Bonds and US$50 million of Class A-2 Bonds are available for retail subscription under the Public Offer

Astrea 8 holds a portfolio of 38 private equity funds which invest in 1,028 companies across diverse industries and geographies. 

Interests would be paid semi-annually, and funded by cash flows from the fund’s investee companies. Excess cash will be set aside for principal repayment in two separate reserves accounts. 

The PE Bonds will mature on 19 July 2039. The tenure of 15 years ls longer than the 10-year tenure for earlier Astrea series. 

The bonds have a mandatory call at the end of 5 years and 6 years, for Class A-1 and Class A-2 bonds, respectively. 

There will be a one-time interest rate step up of 1% per annum if the bonds are not fully redeemed at the call date. 

The PE Bonds cannot be redeemed by the issuer before the call date.

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Proven issuer track record 

Astrea 8 is managed by Azalea, a 100%-owned subsidiary of Temasek Holdings Pte Ltd. The PE Bonds are not guaranteed by any party.

Azalea has a proven track record with all bond obligations fulfilled to date. Astrea III and IV were fully redeemed before the maturity date. 

Astrea V, which mature in 2029, have fully redeemed Class A bonds, and partially redeemed Class B on the call date in June 2024. 

Astrea VI and Astrea 7 have not reached the scheduled call dates. 

Diversified portfolio of PE funds

Astrea 8 is backed by cash flows from a diversified portfolio of 38 private equity funds which invest in 1,028 companies across diverse industries and geographies. The net asset value of the portfolio was US$1,471 million as of 31 December 2023.

The portfolio has exposure to major investment regions, including North America, Europe and Asia. The portfolio breakdown is largely in-line with the regional breakdown of PE assets under management. 

The fund investments were invested across diversified sectors, with information technology representing the largest exposure at 30% of the net asset value as of 31 December 2023. This is followed by industrials (18%), healthcare (14%), and the consumer discretionary sector (12%). 

None of the portfolio companies represent more than 1.3% of the entire net asset value of the portfolio. 

The weighted average fund age is 6.1 years. Mature funds are more likely to generate cash flow. Across vintage years, about 31% of the fund investments were made in 2018, followed by 2019 (26%), and 2017 (24%).

Structural safeguards in place

The Astrea PE bonds are designed with safeguards for bondholders.

#1 - Reserves Accounts Mechanism

The Reserves Accounts Mechanism allows cash build-up to repay the principal amounts of the Bonds.  

While the Class A-1 Bonds are outstanding, the cash will flow into the Reserves Accounts for the redemption of the Class A-1 Bonds. 

After the Class A-1 Bonds have been fully reserved or redeemed, 90% of the cash remaining after application of Clause 1 through Clause 7 will flow into the Reserves Accounts for the redemption of the Class A-2 Bonds. 

#2 - Maximum Loan-to-Value (LTV) Ratio Below 40%

The Loan-to-Value (LTV) ratio is capped at 40%, which is lower than the 50% for earlier Astrea series. If this is breached, additional distributions have to be deposited into the Reserves Account to lower the LTV to 40% before any distribution to equity investors. 

The bond offering will raise US$585 million, or 39.8% of the portfolio value of US$1,471 million as at end-2023 (loan-to-value or LTV). The conservative LTV ratio at issuance may mitigate risk of loss, as the portfolio will need to lose 60.2% of its value before bondholders are impacted. 

In addition, there is an alignment of interest with bondholders, as the sponsor Azalea which owns 100% of the equity will take first loss. 

#3 - Credit Facility 

In the event of cash flow shortfalls, the Issuer may draw on the facility provided by OCBC to fund certain expenses and other amounts payable (including unpaid accrued interest on the Class A-1 and the Class A-2 Bonds) and Capital Calls. 

However, the Credit Facility cannot be used to repay any principal amount on the Bonds.

Decent yield compared to existing Astrea issuances

We would compare the bonds with existing outstanding Astrea series, which are also invested in PE funds managed by Azalea with similar features. 

Existing Astrea S$-denominated issues are priced at yield to call (YTC) of 3.44% to 3.57%. Astrea 8 Class A-1 YTC, at 4.35%, is above this range. 

The YTC of the Class A-2 bonds, at 6.35%, falls within the range of 4.62% and 6.61% for existing US$-denominated Astrea issues. 

However, the Astrea 8 PE bonds have a longer duration compared to previously issued bonds. 

The 5-year Singapore government bond offers a yield of 3.2%. As such, the Class A-1 Bonds offer a yield spread of 1.15% over the Singapore government bond. 

The 5-year US government bond offers a yield of 4.24%. Hence, the Class A-2 Bonds offer a yield spread of 2.11% over the US government bond. The wider spread for Class A-2 bonds is likely due to wider range of investment options in the US dollar debt market. 

The Astrea bonds should offer a higher yield compared to Temasek notes and Singapore Government Securities due to the higher inherent risks of the underlying private equity funds, in our view. 

Given the above, we believe Astrea 8 PE bonds offer a decent yield, and would prefer Class A-1 bonds for the yield premium to existing Astrea S$ issues.

Key risks of Astrea 8 PE Bonds

There are various risks associated with investing in Astrea 8 PE Bonds, including investment risks, market risks, leverage risks, amongst others. 

#1 - Investment Risks

As the Astrea 8 bonds are backed by cash flows from a portfolio of private equity funds, there are investment risks due to the nature of private equity fund investments.  In particular, the amount and timing of distributions from the private equity funds are uncertain. 

In addition, there is limited disclosure on the performance of the underlying investee companies.  As such, it may be difficult to keep track of any decline in the returns or cash flows of the fund investments. 

#2 - Market Risk

Any adverse change in macroeconomic conditions may result in declining private equity asset valuations and deal activities. 

Such market developments may also lead to less distributions from the private equity fund investments if exits on the investee companies happen during a period of declining asset valuations or deal activities. 

#3 - Leverage Risk

The use of leverage by a private equity funds may increase the exposure of Investee companies to adverse financial or economic conditions, which in turn may impact their ability to finance operational and capital needs. This may then lead to less distributions received from the private equity fund investments. 

#4 - Liquidity Risk

The trading market for the bonds may be limited, and there is no assurance that the bonds may be able to be sold at an attractive price.  In addition, there is no certainty as to when the bonds would be fully redeemed before the Maturity Date.

#5 - Exchange Rate Risk

As the Class A-2 bonds are US dollar denominated, bondholders whose investment currency base is not in US dollars may be subject to exchange rate fluctuations.

In particular, a sharp depreciation of the US dollar may lead to foreign exchange losses for Class A-2 bondholders whose investment currency base is not in US dollars. 

What would Beansprout do?

We believe Astrea 8 PE bonds may be attractive for investors seeking regular income over a longer duration, given track record of past Astrea series and safeguards in place. 

We prefer Class A-1 bonds over Class A-2 bonds for the yield premium to existing Astrea S$ issues. 

However, we would need to be aware of the various risks associated with investing in Astrea 8 PE Bonds, including investment risks, market risks, leverage risks, amongst others. 

In addition, Class A-2 bondholders whose investment currency base is not in US dollars may face exchange rate risks from the US dollar denominated bonds.

You can download a copy of our research report on Astrea 8 PE bonds here.

Read also: Where to park your cash for high yield? T-bills vs Fixed Deposit vs SSB (July 2024)

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How to apply for Astrea 8 PE bonds?

You may apply for the Astrea 8 PE Bonds through ATM, internet banking and mobile banking via DBS, POSB, OCBC and UOB.

You will require a CDP account to apply for the Astrea 8 PE Bonds.

• The public offer for the Astrea 8 PE bonds open from 9am on 11 July 2024, and will close at 12 noon on 17 July 2024.
• The Astrea 8 PE Bonds are expected to be issued on 19 July 2024.
• The Class A-1 Bonds and Class A-2 Bonds are expected to list and start trading on the Mainboard of the SGX on 22 July 2024.

You may apply for both the Class A-1 bonds and Class A-2 bonds. 

• The minimum application for the Singapore dollar denominated Class A-1 bonds is S$2,000 per application, and the bonds will be traded in denominations of S$1,000.
• The minimum application for the US dollar denominated Class A-2 bonds is US$2,000 per application, and the bonds will be traded in denominations of US$1,000.

You may only apply for the Astrea 8 PE Bonds using cash. Applicatons for the Astrea 8 PE bonds using CPF or SRS are NOT allowed. 

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Disclosure 

Analyst Certification and Disclosures 

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Disclaimer

Beansprout was appointed by Singapore Exchange Regulation (SGX RegCo) and received monetary compensation from SGX RegCo to provide independent research on the Astrea 8 PE Bonds (Bonds). Beansprout is solely responsible for the contents of this document. Singapore Exchange Limited and/or its affiliates, including SGX RegCo (collectively, SGX Group Companies) assume no responsibility (whether under contract, tort (including negligence) or otherwise), directly or indirectly, for the contents of this document. Approval in-principle granted by Singapore Exchange Securities Trading Limited (SGX-ST) and admission of the Bonds to the Official List of the SGX-ST are not to be taken as an indication of the merits of the issuer, its subsidiaries and/or associated companies, or the Bonds.

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