- Astrea VI bonds are the latest bonds issued under the Astrea bond series.
- The bonds are secured by cash flows from private-equity funds.
- We expect the same strong demand as previous Astrea issues. Investment-grade credit ratings are expected for all Astrea VI Classes A-1, A-2 and B bonds.
Background
The Astrea VI bond is the sixth issuance in the Astrea Platform. It is issued by Astrea VI Pte. Ltd., a subsidiary of sponsor Astrea Capital VI Pte. Ltd. Astrea Capital is an indirect wholly-owned subsidiary of Azalea Asset Management Pte. Ltd., which is wholly-owned by Temasek Holdings. The bonds are asset-backed securities supported by cash flows from a US$1.5bn portfolio of investments in 35 private-equity funds. The funds invest in private equity (PE), an asset class where equity positions are acquired in private companies or publicly traded companies that may be acquired and privatised as a result of a PE transaction.
Highlights
- Risk management. Astrea VI PE funds are mature and have a weighted average fund age of 5.8 years (Figure 3). Mature funds tend to be more cash-generative. Fund managers include established names like Bain Capital (7.9% of NAV), Warburg Pincus (6.4%) and TPG (5.6%). Buyout funds account for about 81% of the funds’ NAV. Buyout strategies historically have the strongest performances among PE strategies. They provide managers with greater control over the investee companies, in terms of managing costs and raising additional capital in times of financial stress. There are a total of 802 companies in the Astrea VI funds, none accounting for more than 3% of the total NAV, providing diversification.
- Structural safeguards. Mandated Reserve Accounts for the Class A-1 and Class A-2 bonds make sure cash flows are set aside for redemptions at the scheduled call dates. The sponsor will share 50% of its entitled cash flows with the Reserve Accounts if the *performance threshold is met. In addition, a conservative maximum loan-to-value ratio of 50% is in place. If exceeded, the Reserve Accounts must be topped up or debt pared down. Finally, a credit facility provided by DBS Bank can be used to cover bond interest payments, certain fees and expenses, and capital calls in times of cash flow shortfalls. The bonds are expected to have investment-grade ratings by Fitch and S&P’s.
- Strong bondholder and sponsor alignment. Bondholders are ranked near the top for priority of payments (Figure 2), above the sponsor. Cash flows generated by the PE funds flow to the bondholders early in the payout order. In 2020, the sponsor waived its entitled cash flows during the onset of COVID-19 to support the Astrea IV and V structures. The sponsor, wholly owned by Azalea, is indirect wholly owned by Temasek.
Demand for previous Astrea bonds was strong. The same is expected for the new Astrea VI. Astrea IV Class A-1 bonds were 7.4x subscribed and Astrea V Class A-1 bonds 4.5x subscribed. We expect bond yields to tighten once the new bonds start trading on the back of strong demand.
*Means aggregate of cash amounts received by the sponsor has amounted to US$420,468,634, being the amount equal to 50% of the total equity of the issuer of US$840,937,267.
Bond classes
There are three classes of bonds issued for Astrea VI: Class A-1, A-2 and B. Class A-1 is denominated in S$ and will be tradeable on the SGX mainboard. Classes A-2 and B bonds are in US$ and are will be traded over the counter.
Figure 1: Astrea VI bond classes
Source: Astrea
Class A-1 S$ bond – Interest Rate 3.00%
Ranked the highest, Class A-1 is the only bond available for public subscription. Issue size is S$375mn, of which S$250mn will be offered to the public. The remainder will be issued to institutions and accedited investors. Interest will be paid semi-annually.
Features:
- Dates: mandatory call date in five years (March 2026) with maturity in 10 years (March 2031).
- Credit rating: expected to be rated investment-grade i.e. A+sf/A+ (sf) by Fitch/S&P’s.
- Coupon step-up: if the bond is not redeemed on the scheduled 5-year call date, there will be a 1.0% p.a. one-time step-up in interest rates. The issuer must redeem the bonds on their maturity date in 10 years.
- Mandatory Reserve Accounts: payments of US$51.5mn shall be made into the Reserve Accounts on every distribution date for the redemption of the bonds on the call date. Any shortfalls will be carried forward to subsequent distribution dates, to be satisfied before the regular reserves for that period.
- Bonus redemption premium: if the performance threshold is met on or before the scheduled call date, Class A-1 bondholders will receive an additional 0.5% of their aggregate principal upon bond redemption.
How to purchase: ATMs (DBS, OCBC, UOB), Internet banking (DBS, OCBC, UOB) and mobile banking (DBS and UOB). Multiples of S$1,000, minimum size of S$2,000. CPF and SRS are not allowed.
Timeline:
- Opening date: 10 March 2021, 9:00 am
- Closing date: 16 March 2021, 12:00 pm
- Trading date: 19 March 2021, 9:00 am
Class A-2 US$ bond – Interest Rate 3.25%
Ranked pari passu with Class A-1 bonds, Class A-2 bonds are denominated in US$ in lots of US$50k. Issue size is US$228mn. Class A-2 bonds is not offered to public retail investors. Interest will be paid semi-annually.
Features:
- Dates: mandatory call date in five years (March 2026) with maturity in 10 years (March 2031).
- Credit rating: expected to be rated investment grade Asf by Fitch.
- Coupon step-up: if the bond is not redeemed on the scheduled 5-year call date, there will be a 1.0% p.a. one-time step-up in interest rates. The issuer must redeem the bonds on their maturity date in 10 years.
- Mandatory Reserve Accounts: payments of US$51.3mn shall be made into the Reserve Accounts on every distribution date for the redemption of the bonds on the call date. Any shortfalls will be carried forward to subsequent distribution dates, to be satisfied before the regular reserves for that period.
- Mandatory partial redemption: should reserves be insufficient to fully redeem all Class A-2 bonds on the call date, partial redemption will be made with the available reserves on the call date, as well as on subsequent distributions dates according to the priority of payments.
How to purchase: over the counter through your broker’s bond desk. Phillip Securities Bond Desk is a distribution partner. Call 6212 1818 or email bonds@phillip.com.sg.
Class B US$ bond – Interest Rate 4.35%
Class B bonds are subordinated to Class A-1 and A-2 and rank lower in the priority of payments. However, they are still expected to be rated BBBsf, an investment grade, by Fitch. The bonds are denominated in US$ in lots of US$200k. They are not offered to retail investors. Issue size is US$130mn and interest will be paid semi-annually.
Features:
- Maturity date: March 2031
- Credit rating: Expected to be investment grade rating BBBsf by Fitch.
- Mandatory partial redemption: after full redemption of both Class A-1 and A-2 bonds, cash flows, according to the priority of payments, will be used to partially redeem Class B bonds prior to maturity.
- Clean-up option: when the outstanding principal amount of Class B bonds falls below US$50mn, the issuer has the option to redeem all principal amount together with any unpaid interest accrued right up to the date of such redemption.
How to purchase: over the counter through your broker’s bond desk. Phillip Securities Bond Desk is a distribution partner. Call 6212 1818 or email bonds@phillip.com.sg.
Risks
- Investment risk. The amount and timing of distributions are uncertain for private-equity fund investments. There are also limited disclosures on the performance of the underlying investee companies, including the returns or cash flows of the fund investments.
- Market risk. Adverse changes in macro-economic or market conditions resulting from events such as rising interest rates or global pandemics could result in falling PE asset valuations and/or deal activities. This may lead to less distributions from the fund investments if the underlying investments are sold during a period of declining asset valuations or deal activities.
- Leverage risk. PE funds are likely to employ leverage. The use of leverage may increase the exposure of investee companies to adverse financial or economic conditions and impair their ability to finance their operational and capital needs. In a rising interest-rate environment or an unfavourable market, such leverage could result in substantial losses to the PE fund portfolios and/or the investee companies and affect the cash flows to Astrea VI.
Figure 2: Bondholders are ranked higher in the priority of payments than the sponsor. Class A-1 bonds are first in priority, followed by A-2, then B.
Source: Astrea
Figure 3: Weighted average fund age is 5.8 years
source: Astrea
Figure 4: Diversified portfolio of PE companies
source: Astrea
Appendix
The issuer. The issuer, Astrea VI Pte. Ltd., was incorporated in Singapore on 25 September 2019 as a private company with limited liabilities. The issuer is an indirect wholly-owned subsidiary of Azalea.
The issuer is a special purpose vehicle that will issue the bonds. It is also the holding company of the asset-owning companies, which in turn hold the fund investments.
The sponsor. Astrea Capital VI Pte. Ltd., the sponsor, was incorporated in Singapore on 24 September 2019 as a private company with limited liabilities. The sponsor is the sole shareholder of the issuer and sole owner of the equity investments. It is also an indirect wholly-owned subsidiary of Azalea.
The sponsor has been incorporated for the purpose of initiating the transaction.
The manager. Set up in 2015, Azalea is wholly-owned by Seviora Holdings Pte. Ltd. and indirect wholly-owned by Temasek Holdings. Azalea is an investor, developer and manager of private assets, starting with private equity. Azalea invests in PE funds with a focus on the development and innovation of new investment platforms and quality products to make private equity accessible to a broader group of investors.
Source: Astrea
