On 19 May 2022, Azalea Investment Management launched its latest batch of Astrea private equity (PE) bonds for public subscriptions. There will be two types of bonds available to retail investors:
- Class A-1 Bonds with a fixed interest rate of 4.125% per annum and,
- Class B Bonds with a fixed interest rate of 6% per annum.
Given the current market volatility, should you consider investing in these bonds today? Let’s look at what it has to offer and you can make your judgment.
Who is Azalea?
Astrea bonds are popular among Singapore investors due to the fact that its ties can be traced back to Temasek.
The Astrea 7 PE bonds are issued by Astrea 7 Pte. Ltd, an indirect wholly-owned subsidiary of Azalea. Azalea, in turn, is a wholly-owned subsidiary of Seviora Holdings, which is then wholly owned by Temasek.
What is the Astrea 7 bond?
With the success of its prior bonds, Astrea 7 will be the fourth listed PE bond offered to retail investors. By subscribing to it, you are effectively lending to Azalea, who will use the capital to invest in a portfolio of private equity funds.
For those unfamiliar with the term, private equity is an investment class that invests in corporate entities (companies not listed in the public market). Investors in these private entities hope to improve and add value to them before selling for a profit.
Similar to Astrea VI, Astrea 7 focuses on two strategies for its portfolio:
- Buyout (Purchase of controlling stakes) and
- Growth equity (Investment in companies seeking growth).
At the time of launch, it will have stakes in 38 PE Funds, comprising 982 companies.
In terms of geographical allocation, the United States accounts for 55%, followed by Europe at 27%, and Asia at 18%.
The investee companies are also widely diverse across numerous industries, with the largest, Information Technology, accounting for 34% of NAV, and individual companies accounting for less than 1.5% of NAV.
Key features
Technically, Astrea 7 offers three bond classes: A-1, A-2, and B, with each class catering to investors with varying risk tolerances and investment horizons. However, since Class A-2 would not be available to retail investors, we will skip that.
Class A-1 Bonds (SGX: V7AB)
As the most senior bond class, along with Class A-2, investors in these bonds would be paid first before others, providing another layer of safety. In a nutshell:
- Public offer: S$280 million
- Interest Rate: 4.125% p.a. payable semi-annually
- Maturity date: 27 May 2032
- Fitch Ratings: A+sf
- Denominated in SGD
The bond would also have a 10-year maturity and a mandatory call after five years.
This mandatory call essentially implies that the Issuer must redeem the Class A-1 Bonds on 27 May 2027 if sufficient cash is set aside to repay the Class A-1 Bonds and other requirements are met. Otherwise, the interest rate on the Class A-1 Bonds will rise from 4.125 % to 5.125 % per annum after this date until the Class A-1 Bonds are fully redeemed.
Class B Bonds (SGX: V7BB)
This is the first time that Class B Bonds are available to retail investors.
Compared to Class A-1, this is much riskier given that Class A bonds receive priority in terms of interest payment and redemption. Some other information includes:
- Public offer: US$100 million
- Interest Rate: 6% p.a. payable semi-annually in SGD (Converted by CDP by default)
- Maturity date: 27 May 2032
- Ratings: BBB+sf
- Denominated in USD
Furthermore, Class B Bonds have a 10-year maturity period and a 6-year mandatory call.
In the instance of a 6-year mandatory call, if there are no outstanding Class A Bonds and there is sufficient cash set aside to repay the Class B Bonds, as well as other conditions are met, the Issuer will be obligated to redeem the Class B Bonds on 27 May 2028.
Otherwise, the interest rate on the Class B Bonds will increase from 6% to 7% per annum after this date until the Class B Bonds are fully redeemed.
Key differences between Class A-1 and Class B Bonds
Overall, here are some major differences to consider while choosing between the two.
Currency Denominations
To begin, Class A-1 Bonds are denominated in Singapore dollars, whilst Class B Bonds are denominated in US dollars.
Risk
While both Class A-1 and Class B bonds are projected to obtain investment-grade credit ratings, Class B bonds is riskier than Class A-1 bonds, as it ranks lower than Class A bonds.
Reward
Of course, the increased risk is compensated for by a greater return of 6% p.a. as opposed to 4.125%.
Safeguards
As with prior Astrea bond offerings, various structural safeguards are in place for Astrea 7. Firstly it is the diversification of the Astrea 7 portfolio.
Following that are the safeguards that will help to limit the Astrea 7 bonds’ downside risks.
1. Reserves Accounts
Over the coming years, once the PE companies have matured and sold by the PE fund manager, the cash will be distributed to Astrea 7, which can be used to fund capital calls. Any funds remaining at the end of every six months must pass via the priority of payments, which specify how the cash can be allocated. Along with bondholder interest payments, the payment for reserve accounts is near the top of the list.
This Reserves account allows the Issuer to build sufficient reserves to redeem the bonds when their respective scheduled call date approaches.
2. Maximum Loan-to-Value (LTV) Ratio
This provision ensures that adequate assets remain in the system since its loan to value ratio had to be less than 50%. If it surpasses this level, any remaining cash after the distribution to bondholders and into the reserves account must be allocated here, resulting in no payout to the sponsors.
3. Credit Facility
In the event of a cash flow deficit, the Issuer may also obtain additional funds from DBS to fund certain expenses and other payable, including unpaid accrued interest on the Bonds.
Key Risks
As with any investment, the Astrea 7 bond carries certain risks.
Investment Risk
Since not all private equity investments will be as successful as we would like, there is a danger of losing money here.
Market Risk
An adverse change in macroeconomic conditions, such as rising inflation and/or interest rates, or market conditions caused by events like as changes in the geopolitical landscape, could result in declining PE asset valuations.
In our case, we now have escalating conflict in Europe, rising inflation and interest rates, and a slowing in global economic growth, all of which may impact the extraction of value from the PE.
Leverage Risk
PE funds are likely to invest in debt. In a rising interest rate environment, it may have a negative impact on Astrea 7 cash flows.
Forex Risk
In the case of Class B Bondholders whose investment currency base is in US$, you will be subject to exchange rate fluctuations. Such fluctuations may result in foreign exchange losses for these Class B Bondholders.
How to apply for Astrea 7 bonds?
If you are interested in Astrea 7 bonds, you can apply using one of the following means:
- ATMs of DBS (including POSB), OCBC and UOB
- Internet banking websites of DBS (including POSB), OCBC and UOB
- Mobile banking application of DBS and UOB
Before applying, you must have a direct Securities Account with Central Depository (CDP). In addition, for Class A-1 Bonds, a minimum of S$2,000 and multiples of S$1,000 is required, and for Class B Bonds, a minimum of US$2,000 and multiples of US$1,000 is required.
*While Class B Bonds are denominated in US dollars, applications will be accepted in Singapore dollars at a fixed exchange rate of US$1.00:S$1.3866.
Key Astrea 7 bonds application dates to note:
- Application start date: 20 May 2022, 9 am
- Application close date: 25 May 2022, 12 pm
- Bond issue date: 27 May 2022
- Listing on SGX: 30 May 2022
For more information, you can look at the prospector from the Azalea website. Alternatively, you can collect it from selected DBS/POSB branches until 12 noon on 25 May 2022.
Note: While Astrea 7 PE Bonds are considered lower-risk investments and have an affiliation to Temasek, it should be emphasized that the Bonds are not guaranteed by Temasek.
This is not financial advice, do your own research before deciding if the Astrea 7 PE bonds are suitable for you.
Frequently Asked Questions
Can I use CPF to invest/buy Astrea 7 bonds?
Prospective investors CANNOT use their CPF Funds to apply for the initial offer of the Class A-1 Bonds or the Class B Bonds nor from the market thereafter.
The Class A-1 Bonds and the Class B Bonds are not eligible for inclusion under the CPF Investment Scheme.
On maturity/call of class B , will you be paid back in USD?
By default, CDP will convert the interest from USD to SGD. However, investors can opt to receive in USD.
for the class B, if we wait for it to be avail for trade on SGX, instead of the IPO. do we buy it at USD ?
Yes, it will trade in USD
Dr Wealth,
I find your sharing of the Astrea 7 bond informative and easy to understand. Thanks alot !!!