Astrea 9 Private Equity Bonds – Three classes for investors
Around one year after issuing Astrea 8 PE bonds, Azalea Asset Management (“Azalea”) is back with Astrea 9. Azalea Asset Management (“Azalea”) has announced the offer of Astrea 9 Private Equity (“PE”) bonds, which will comprise three classes: i) Class A-1 (S$), ii) Class A-2 (US$), and iii) Class B PIK (US$) (“Paid-in-kind”). In total, the offering size of all three classes of Astrea 9 PE bonds is approximately USD 780m and expected to be investment-grade rated, with a 15-year maturity term (matures in August 2040) (Table 1).
Similar to the past Astrea series, Class A-1 and Class A-2 will be ranked pari passu (i.e., equally to each other) and will be offered to retail investors in Singapore. Both Class A bonds are subjected to a mandatory call in 5 years upon conditions being met. For the mandatory call to be exercised, there needs to be sufficient cash set aside in the Reserves Account to redeem the bonds, with no outstanding Credit Facility loan. If the Class A bonds are not redeemed on their scheduled call date, their annual interest rates will be subjected to a one-time 1.0% p.a. step-up.
Unlike Astrea 8, which comprises only Class A bonds, Astrea 9 also offers Class B PIK bonds. These are “Paid-in-kind” bonds which accrue interest (instead of being payable) at the end of each distribution period, which is then added to the original principal, compounded over time. Astrea 9’s Class B bonds are offered to institutional or accredited investors in Singapore and outside the United States, but not to retail investors in Singapore.
A public offer exercise will follow after the private placement exercise, where the initial price guidance (“IPG”) for Astrea 9 bonds will be determined. Retail investors will be offered the same interest rates through the public offer exercise. Subsequently, the Astrea 9 PE bonds are expected to be listed on the SGX-ST Mainboard for secondary trading. According to the proposed timeline in the prospectus, application for the public offer of Class A bonds will be from 31 July (9 am) to 6 August (12 pm).
In the table below, we highlight key information of the upcoming three classes.
Table 1: Quick Summary of the Astrea 9 PE Bonds
|
Tranche |
Private placement size |
Public offer size |
Scheduled call date |
Maturity date |
Expected ratings (Fitch)* |
Loan-to-Value ratio |
|
Class A-1 |
S$ 215m |
S$ 400m |
August 2030 |
August 2040 |
A+ (sf) |
29.5% |
|
Class A-2 |
US$ 150m |
U$ 50m |
August 2030 |
August 2040 |
A (sf) |
12.3% |
|
Class B PIK |
US$ 100m |
- |
N/A |
August 2040 |
BBB (sf) |
6.2% |
|
Sources: Astrea 9 information package, Azalea Asset Management * “sf” suffix refers to structured financial instrument. |
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About the Astrea Series Bonds
For those investors who are hearing the name Azalea or the Astrea platform for the first time, Azalea Asset Management (“Azalea”) is a wholly-owned subsidiary of Seviora and indirectly owned by Temasek Holdings (Private) Limited. It primarily invests in private equity (“PE”) funds and develops investment products to make PE accessible to a broader group of investors.
One example of such products is the Astrea series PE bonds , which are asset-backed securities supported by cash flow from the underlying PE investment portfolio. Every Astrea series consists of a diversified portfolio of PE funds managed by reputable general partners (“GP”), and each of these funds invests in several investee companies. For Astrea bonds, cash flows are typically generated from exiting/selling the underlying investee companies, which are subsequently used to pay interest coupons and for redemption of the principal.
A look at the Astrea 9 Portfolio
The Astrea 9 PE portfolio has an indicative NAV of US$1,625m, larger than Astrea 8’s US$1,471m, reflecting the larger number of PE funds, general partners (“GP”), and investee companies (Table 2). Similar to Astrea 8, the portfolio is focused on buyout and growth equity strategies, with 83% of the NAV in buyout funds and the remainder in growth equity funds. We consider the portfolio to be well-diversified globally and across PE funds and GPs, with the largest fund and GP accounting for less than 4% and 6% (of total NAV), respectively. A diversified portfolio is important to mitigate idiosyncratic risks and volatile cash flows of individual PE funds.
The Astrea 9 PE portfolio has a weighted average age of 5.5 years, slightly shorter than Astrea 8’s 6.1 years (at launch), but we still see the portfolio as relatively mature and cash generative. Based on cash flow patterns suggested by the J-curve in PE, these funds tend to deliver net cash outflows in their earlier years but net inflows in the later years - typically from the fifth to sixth year onwards - as inflows (i.e., exiting investments) outpace outflows (i.e., capital calls, management fees).
Thus, in the portfolio, it is expected that mature PE funds will contribute to near-term cash flows while the younger PE funds will support cash flows in the later part of the portfolio’s lifecycle. Looking at Astrea 9’s underlying PE funds, we think the need for the portfolio to divert cash flows toward fulfilling capital commitments should be manageable. Around 76% of Astrea 9’s PE funds are 5-year-old and above (vintage year from 2017 – 2020), which are likely cash generative. At the same time, we think the portfolio’s indicative undrawn capital commitments are likely manageable, totalling USD303.7m (18.6% of NAV). Undrawn capital commitments refer to the amount of capital that the PE investors are obliged to contribute to the PE Fund.
Table 2: Comparison between the Astrea PE portfolios
|
|
Astrea 9 |
Astrea 8 |
Astrea VII |
|
NAV (USD m) |
1,625.20 |
1,471.40 |
1,904.80 |
|
Undrawn Capital Commitments (% of NAV) |
18.7 |
9.0 |
13.1 |
|
Total Exposure (USD m) |
1,928.90 |
1,604.10 |
2,155.20 |
|
No. of PE Funds |
40 |
38 |
38 |
|
No. of GPs |
31 |
27 |
29 |
|
No. of Investee Companies |
1086 |
1028 |
982 |
|
Weighted Average Age (Years) |
5.5 |
6.1 |
5.3 |
|
Investment Region, Fund Level (% of NAV) |
US (66%), EU (26%), Asia (8%) |
US (63%), EU (20%), Asia (17%) |
US (55%), EU (27%), Asia (18%) |
|
Largest Fund Strategy Exposure (% of NAV) |
Buyout (83%) |
Buyout (76%) |
Buyout (77%) |
|
Largest PE Fund Investment (% of NAV) |
Warburg Pincus Global Growth, L.P. (3.8%) |
Insight Venture Partners (5.1%) |
Permira V L.P. (4.2%) |
|
Largest General Partner (% of NAV) |
Thoma Bravo (5.9%) |
Insight Partners (8.1%) |
Warburg Pincus (8.5%) |
|
Source: Prospectus of Astrea VII, Astrea 8, and Astrea 9, iFAST compilations |
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Structural Safeguards for Astrea 9 PE Bonds
Similar to past Astrea issuances, Astrea 9 consists of multiple structural safeguards in place to protect bondholders’ interests and mitigate risks. These safeguards include:
1. Reserves Account – Cash is required to be set aside in the Reserves Account to redeem the bonds on the mandatory call date, with Class A-1 bonds having priority before Class A-2 bonds. Distributions into the Reserves Account are made before any distributions are provided to the Equity Investor (Azalea), which further helps to ensure that bondholders are prioritised over equity investors.
2. Maximum Loan-to-Value (“LTV”) Ratio – A maximum LTV cap is maintained at 50% for Class A bonds. If the LTV crosses the cap, additional distributions will be made to the Reserves Account to lower the ratio until it falls below 50%, before distributions can be made to the Equity Investor (Azalea). Azalea (through the sponsor) will retain the entire equity stake of Astrea 9, which constitutes 52.7% of NAV at inception. This serves to facilitate strong alignment of interests between the sponsor and bondholders, as the equity investor is the first in line to absorb losses of the structure and the last person to receive liquidation proceeds in an event of default. For Class B bonds, a maximum LTV cap is maintained at 55%.
3. Credit Facility – In the event of cash shortfall, the portfolio may draw on the credit facility with OCBC to fund certain expenses, payables, and capital calls. Any prior drawdowns on the facility will need to be cleared first before distributions are made to bondholders and equity investors. Per management, the credit facility is sized such that it caters to 2-3 years of expenses and capital calls. Management also specified that none of their portfolios, thus far, had needed to touch on the portfolio’s respective credit facility.
Other Differences with Astrea 8 PE Bonds
Besides some of the differences outlined in the sections above, there are other minor differences between Astrea 9 and 8 PE bonds which might be of consideration for investors.
1. Astrea 9 comprises three classes, Class A-1 (S$), Class A-2 (US$), and Class B PIK (US$), while Astrea 8 comprises two classes of bonds, Class A-1 (S$) and Class A-2 (US$). Astrea 7 was the last series that offered Class B bonds (but was not PIK).
2. Astrea 9’s Class A-2 had a non-call period of 5 years while Astrea 8’s Class A-2 had a non-call period of 6 years. Both Astrea 8 and 9’s Class A-1 have a non-call period of 5 years.
3. Astrea 9’s Class A bonds have a higher maximum LTV ratio of 50% whereas Astrea 8’s Class A bonds have a maximum LTV ratio of 40%.
Update: For more information on the key credit features of Astrea 9 bonds and our opinion on their pricing, please refer to the related article.
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