Astrea VI Bonds – what you need to know before investing

With the low-interest environment, you may be looking for an alternative place to keep your savings and/or war chest to beat inflation. With the announcement of Astrea VI bond (SGX: 6AZB) by Azalea, you need look no further.

Who is Azalea?

Astrea VI bonds are issued by Astrea VI Pte. Ltd., a wholly-owned subsidiary of Azalea.

Azalea is an indirect wholly-owned subsidiary of Temasek Holdings (Private) Limited with the aim is to make private equity accessible to retail investors as it usually require a high amount of investment capital.

This will be the 4th bond from Azalea with Astrea III in 2016, Astrea IV in 2018 ,and Astrea V in 2019. (Astrea I and Astrea II were issued by Temasek and to date, all bond obligations have been fulfilled.)

What is the Astrea VI bond?

When you buy Astrea VI bond, you will be lending to Azalea who will use the money to invest in a portfolio of private equity funds.

For those new to this term, private equity is an investment class that invests in private companies (companies not listed in the public market). Investors investing in these private companies hope to make improvements and create value for these companies before selling for a profit. This market has been growing over the year at an annual rate of 11.7% to US 5.8 trillion in 2020!

Astrea VI focuses on 2 strategies for its portfolio:

• Buyout (Purchase of controlling stakes) and
• Growth equity (Investment in companies seeking growth).

Currently, it has investments in 35 PE Funds which make up a total of 802 companies at launch.

There will be 3 different classes of PE bonds (Class A-1, Class A-2, and Class B).

The table below shows the 3 classes’ credit rating, interest rate, scheduled call date, and maturity date. Only $250m of Class A-1 bond is offered to retail investors and will be listed on SGX Mainboard (SGX: 6AZB).

Class A-1 PE bond is expected to be rated as A+sf / A+ (sf) by Fitch and S&P. Essentially this means it is an an investment-grade bond that is unlikely to default.

Astrea VI Class A-1 Bonds

Since only class A-1 bond is available to retail investors, we will focus more on that here.

Key Features

In a glance:

• 3% p.a interest payable semi annually
• Maturity of 10 years (18 March 2031)
• Bonus payment of 0.5% at redemption if performance condition is met
• Mandatory Call at the end of year 5 if condition is met (Sufficient reserves to redeem the bond) (18 March 2026)
• 1.0% p.a one-time interest step-up if bond is not redeemed after 5 years
• Public offer of S$250m for retail investors
• Expected A+sf/A+ (sf) rating by Fitch and S&P

Transaction structure of Astrea VI

For a better understanding of the whole transaction structure, you can take a look at the infographic below to understand how money flows within Astrea VI.

The main stakeholders of Astrea VI are:

• Azalea – Investment manager
• Bondholders – Holders of the bond
• DBS – Trustee and creditor

Cash Flow & Priority of Payments

Over the coming years, once the PE companies has matured and sold by the PE fund manager, the cash will be distributed to Astrea VI which can be used to fund capital calls. At the end of every 6 months any cash remaining must flow through the priority of payments which state how the cash can be used.

In general, the flow is as such:

1. Payments for fees like taxes, hedge counterparties, manager fee and credit facility
2. Interest payment to bond holders (Class A takes priority over bond Class B)
3. Cash reserves for repayment of bonds
4. Ensuring LTV ratio does not exceed the threshold of 50%*
5. Additional payments (if required)
6. Sponsors (if applicable, with sharing)

*One thing you can see from the priority of flow is that as bondholders, you are well-taken care of by the sponsor. Clause 10 (in image below) ensures that sufficient assets are remain in the structure as the Loan to value ratio must be lesser than 50%. If it exceeds this amount, the sponsor cannot receive any cash.

Is the Astrea VI bond safe?

From the information above, you could see how Astrea VI has structural safeguards in place (namely reserves account, sponsor sharing, maximum LTV ratio, and credit facility to pay any interest) in the event of a shortfall.

Additionally, Astrea VI is well diversified across geography, multiple sectors, and across vintage years with no companies greater than 3% of NAV. By investing in a diversified portfolio of PE funds, Astrea VI has minimal volatility.

Lastly, the loan to value ratio is less than 50%. Meaning the value of assets is more than twice the value of bond issues.

Key Risks

Like all investments, Astrea VI bond does come with its risk. Here are the 3 main risks listed out by Azalea:

• Investment risk

Not all Private equity will be as successful as we wish to be, as such there is a risk of losing investment here.

• Market Risk

Change in market conditions like last year’s global pandemics can also result in falling PE asset valuations.

• Leverage Risk

PE funds are likely to use debt for investment. In a rising interest rate environment, it could result in an adverse impact on Astrea VI cash flows.

How to apply for Astrea VI bonds?

If you are interested in Astrea VI, you can apply via ATM, Internet banking, or mobile banking with a minimum amount of S$2,000 and in multiples of $1,000.

Key application details to note:

• Application start date: 10 March 2021, 9am
• Application close date: 16 March 2021, 12pm
• Bond issue date: 18 March 2021

For more information, you can take a look at the prospector here. Alternatively, you can collect it from selected DBS/POSB branches from now till 16 march 2021.

Azalea will also be conducting Astrea VI Live Q&A session on 12 March 2021, from 12.00 pm to 1.00 pm for investors. If you are unable to attend, key questions will be made available online after the event.

This is not investment advice. To learn more about bonds, read this guide.