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Astrea V Class A-1 Private Equity Bonds: Important Aspects Investors Should Know

Azalea, a wholly-owned subsidiary of Temasek Holdings, has started offering the Astrea V Class A-1 private equity (PE) bonds for public subscription. This comes after the successful launch of the Astrea IV bonds last year. Here are some key highlights to note from Astrea V’s prospectus before investors subscribe to the bonds.

What are Astrea V PE bonds?

The Astrea V PE bonds are asset-backed securities backed by cash flows from investments in 38 PE funds. Those funds are invested in a total of 862 companies across the US, Europe, and Asia. The whole portfolio has a value of US$1.3 billion.

There are three classes of bonds – Class A-1, Class A-2, and Class B. The principal amount of the Class A-1 bond is S$315 million. Of which, S$180 million worth of Class A-1 bonds are being offered to retail investors in Singapore, and the remaining S$135 million are offered to institutional and accredited investors. The Class A-2 and Class B bonds are in US dollars and are also not available to the public. Class A-1 and Class A-2 bonds rank equally as the most senior class of bonds.Source: Astrea V prospectus

The retail tranche has a fixed annual interest of 3.85% with interest payments every six months (on 20 June and 20 December). The bonds have a maturity age of 10 years, with a mandatory call at the end of the fifth year (hence the term “10MC5” you might see in the prospectus) if two conditions are met:

  • The cash set aside is sufficient to redeem all Class A-1 bonds and;
  • There are no outstanding credit facility loans.

20 June 2024 marks the end of the fifth year, which is when the bonds have to be redeemed. If the bonds are not redeemed by then, there will be a one-time annual interest rate step-up of 1% to 4.85%. The maturity date of 20 June 2029 is the latest date on which the bonds have to be redeemed fully.

There’s also a bonus payment of 0.5% at redemption if the sponsor receives US$407 million (50% of issuer’s equity) on or before 20 June 2024.

It should be noted that the Astrea V PE bonds are not guaranteed by any entity, including Temasek.

Source: Astrea V prospectus

More on the portfolio of PE funds

A PE fund is managed by a professional manager (called a general partner), and multiple investors provide capital funding (called limited partners). Using the capital, the manager invests in a portfolio of private companies. Azalea is an investor that invests in private equity funds and packages them into diversified portfolios.

The Astrea V portfolio has 862 companies that are diversified across multiple industries, with information technology making up the bulk of the portfolio at 24%. None of the companies is more than 2% of the portfolio’s net asset value (NAV).

Source: Astrea V prospectus

The weighted average fund age is 5.4 years, with the majority of the portfolio (25.2% of NAV) invested in 2014.

In terms of geographical diversification, most of the companies are from the US (56% of the portfolio NAV) since the US PE market is the most developed in the world. The remaining are split between Europe and Asia (22% each).

Over 80% of the funds are focused on the buyout strategy and 19% on growth equity. The buyout strategy has the strongest historical performance among PE strategies. You can check out Astrea’s website to find out about the various PE strategies.

Payment priority and safeguards

Astrea V will receive cash from its portfolio of PE Funds when the invested companies are sold. These cash inflows are then used according to the priority of payments (shown below), to pay for its expenses, interest payments to bondholders and principal repayments.

Source: Astrea V prospectus

There are structural safeguards put in place to protect investors of the Astrea V bonds. One of them is the building up of the reserves account according to the priority of payments. Another safeguard is that if the maximum loan-to-value (LTV) ratio of 50% is exceeded, there would be a trigger to lower the total net debt. The current LTV ratio is 45.3%, which means that the PE portfolio value is more than twice the value of Astrea V bonds issued.

Source: Astrea V prospectus

Risks involved

No investment is free of risks, and that includes the Astrea V PE bonds. One key risk of investing in PE funds is that of leverage. When a financial crisis strikes, highly-leveraged companies may be unable to pay off their loans, and that could result in a huge loss to the PE fund. This then affects the cash flows back to Astrea V.

Some of the other risks include defaults, interest rates, and market risks. Investors are advised to look at the prospectus and understand the risks involved before investing in the bonds.

How to apply?

Retail investors who are keen to apply for the Astrea V PE bonds can do so from now till 18 June 2019 (12 pm). The minimum application is S$2,000 and any application has to be done in multiples of S$1,000.

Source: Astrea V prospectus

Trading of the retail bonds is expected to start on 21 June 2019 (9 am) on the Singapore stock exchange. Do note that you cannot use CPF funds to invest in the Astrea V PE bond.

So, should you invest?

It all depends on your financial goals and objectives. Those who wish to diversify their investments into bonds and private equity in one-go might like the Astrea V PE bond. However, investors should note that their money could potentially be locked up for at least five years unless there is enough liquidity on the Singapore stock exchange (given the relatively illiquid nature of bonds versus stocks).

Investors could also consider other alternatives for their money, including investing in high-yield, income-generating instruments such as real estate investment trusts (REITs), exchange-traded funds (ETFs) that have high distribution yields, or dividend shares.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.