Astrea 8 – Your golden ticket to the retail bond space

Astrea 8 Private Equity Bonds

Azalea Investment Management (“Azalea”) has announced the launch of Astrea 8 Private Equity (“PE”) bonds – to be launched in two classes: Class A-1 denominated in SGD, and Class A-2 denominated in USD. The PE bonds are issued under Astrea 8 Pte. Ltd., wholly owned by Azalea and in turn, indirectly wholly owned by Temasek Holdings.

Today marks the private placement exercise for the Astrea 8 PE bonds – with Class A-1 SGD bonds at the initial price guidance (“IPG”) of 4.70%, and Class A-2 USD bonds at the IPG of 6.70%. Note that the private placement exercise will be made available to accredited and institutional investors only.

Following the private placement exercise, Azalea is expected to put the Astrea 8 PE bonds on public offer on 11 July 2024. Retail investors will be offered the same interest rates through the public offer exercise, as those offered to institutional and accredited investors from the private placement. Subsequently, the Astrea 8 PE bonds are expected to be listed on the SGX-ST Mainboard for secondary trading.

The two tranches, Class A-1 and Class A-2, will be ranked pari passu (i.e. ranked equally to each other). The total offering size of Astrea 8 PE bonds is approximately USD 585m, both expected to be issued in July 2024 with a 15-year maturity term (matures in July 2039). In the table below, we highlight several crucial information of the upcoming two tranches.

Table 1: Quick Summary of the Astrea 8 Portfolio

Class A-1 SGD bonds

• The Class A-1 bonds are subject to a mandatory call in 5 years (July 2029) upon conditions being met. If uncalled, there will be a one-time 1.0% p.a. step up in the coupon rates. 
  
  
• For the mandatory call to be exercised, there needs to be sufficient cash set aside in the Reserves Account and Reserve Custody Account to redeem the bonds, and there is no outstanding Credit Facility loan.
  
  
• For the Class A-1 Public Offer, each application will need to be at least SGD 2,000 or higher (in multiples of SGD 1,000).

Class A-2 USD bonds

• The Class A-2 bonds are subject to a mandatory call in 6 years (July 2030) upon conditions being met. If uncalled, there will be a one-time 1.0% p.a. step up in the coupon rates.
  
  
• For the mandatory call to be exercised, there needs to be no outstanding Class A-1 bonds to be redeemed (i.e. A-1 bonds need to be fully redeemed first), on top of the same conditions as with Class A-1 bonds redemption.
  
  
• For the Class A-2 Public Offer, each application will need to be at least USD 2,000 or higher (in multiples of USD 1,000).

About the Astrea issuances and Private Equity bonds

For investors new to Astrea’s PE bonds, these are secured bonds backed by cash flows from the underlying investment – the PE funds portfolio. Every Astrea series consists of a well-diversified portfolio of PE funds managed by reputable General Partners – such as KKR and Blackstone. Each of these funds invests in several investee companies. For Astrea bonds, cash flows typically come from selling the investee companies, subsequently used to pay the interest coupons and for the redemption of the principal of the PE bonds.

For Astrea 8’s portfolio, the Net Asset Value (“NAV”) is at USD 1,471.4m, with 76.4% being buyout-focused and 23.6% being growth-focused. Buyout usually involves the buying over of the controlling stakes in an investee company, allowing the fund to exercise control over its operations. The fund seeks to improve the investee company’s operation and capital structure, eventually targeting to profit from selling the company. For growth, it primarily involves investing in companies that are determined to be still undergoing rapid business expansion.

The underlying funds within the Astrea 8 portfolio are considerably diversified, given the total number of 1,028 investee companies across the PE funds. Additionally, we like the over-collateralization on Astrea 8 – the portfolio NAV is at approximately 2.5 times the total bond issuance size and the Loan-to-Value ratio of the bonds stands at 39.8%. This leaves a significant buffer for any economic downturns impacting the PE market, before affecting the Astrea 8 PE bonds.

The weighted average age of the underlying PE funds is relatively mature at about 6.1 years. A more mature PE fund is generally better for the investors given the tendency for investee companies to exhibit positive net cash flows in their later years. Azalea pointed out that it had sought to invest primarily in PE funds of about five years and above, where most companies will begin to see net distributions.

Azalea’s view on the Private Equity market

Within the Astrea 8 Preliminary Prospectus, Azalea outlined several trends observed over the past years, alongside its opinions on the Private Equity market. Below, we have summarised some of such trends that might be important to investors’ consideration.

1. It noted that buyout deal activities had predominantly been on an upward trend since the Global Financial Crisis in 2009, but fell in 2023 owing to macroeconomic uncertainty and elevated interest rates. Despite this, Azalea reflects that the buyout exits remained largely in line with the exit activities over the last 10 years.
   
   
2. For the historical PE returns, Azalea’s focus – the buyout and growth strategies – saw higher median net internal rates of return (“IRR”) at 16.0% and 14.0% respectively (across fund vintages of 1990 to 2019). This compares favourably against the median net IRR of 11.7% and 10.3% for venture capital and private debt.
   
   
3. Azalea highlighted that “buyout funds have historically outperformed public markets” with buyout funds represented by Preqin Private Capital Quarterly Index Return and public markets represented by S&P 500. 

The long-term view appears to be largely supportive of private markets, especially in view of interest rates are already at or past their peaks. We expect Astrea 8 PE bondholders to benefit from this – with a consistent cash flow from the distribution to enable the interest payments and smooth accumulation of the Reserves Account (for the earlier redemption on the mandatory call date).

Structural Safeguards for Astrea 8

Similar to previous Astrea issuances, Astrea 8 consists of several structural safeguards in place to protect bondholders’ interests.

1. Reserves Account – Cash is required to be set aside in the Reserves Account for building up sufficient reserves to redeem the bonds on the mandatory call date. The accumulation of reserves will continue until the bonds are fully reserved. In addition, distributions into the Reserves Account are made before any distributions are provided to the Equity Investor (Azalea). This further helps to ensure that bondholders are prioritised over equity investors.
   
   
2. Maximum Loan-to-Value (“LTV”) Ratio – The LTV cap is at 40%, which largely serves as a trigger to accelerate the payments into the Reserves Account. In the case of a valuation decline that triggers the 40% cap, additional distributions have to be made to the Reserves Account to lower the LTV ratio until it falls below 40% before distributions can be made to the Equity Investor (Azalea).
   
   
3. Credit Facility – The portfolio may draw on the credit facility it has with OCBC to fund certain expenses, other amounts payable (including unpaid accrued interest on bonds) and capital calls. Any previous drawdowns on the credit facility will need to be cleared first before distributions are made to bondholders and equity investors. Most notably, Azalea specified that none of their portfolios, thus far, had needed to touch on the portfolio’s respective credit facility.

In addition to the structural safeguards, we believe the payment distribution order (or the priority of payments) benefits bondholders greatly. After accounting for the relevant expenses, distributions will first be made to bondholders for the interest payments. This is followed by the necessary accumulation into the Reserves Account (and an additional amount if the LTV cap is breached), and lastly, distribution will be made to the Equity Investor (Azalea) only after all prior clauses are fully paid. Overall, we believe these features truly highlight Azalea’s focus on bondholders’ interests, making Astrea 8 an attractive consideration.

Some changes from the previous Astrea issuances

We observed some interesting changes to the Astrea 8 PE bonds – some might be of important consideration when comparing against the past issuances.

•  For Astrea 8, we see a streamlined issuance of only Class A-1 and Class A-2 bonds, missing the Class B bonds featured in previous Astrea issuances. Concurrently, this means an overall smaller issuance size available for investors, which might lead to stronger pressure for pricing to adjust downwards from the IPG.

Table 2: Total issuance size across all tranches for past Astrea series

• Astrea 8 PE bonds have a longer maturity term of 15 years, as compared to the 10-year maturity term for past Astrea issuances. The management has indicated that this is to align the legal maturities with similar bonds in the market, which would allow for a better comparison. With that said, both the Astrea 8 Class A-1 and Class A-2 have an embedded mandatory call option at the end of the 5th year and 6th year respectively, as detailed above. The mandatory call option continues to be a similar feature as with previous Astrea issuances.
  
  We believe this change will be more pertinent for the Astrea 8 Class A-2 USD bonds, given that the cash reserves within the Reserves Account will be prioritised for the redemption of Class A-1 bonds. Investors ought to take note of the potential duration risk on the Class A-2 bonds, especially in the event that the bonds remain unredeemed by the end of 6th year.
  
  
• Astrea 8 PE bonds similarly do not have the “Sponsor Sharing” feature – present in Astrea VI and before, but not in the previous Astrea 7. Past Astrea issuances (Astrea IV, V and VI) have this particular feature in their Class A-1 SGD bonds where additional distribution is redirected to the Reserves Account after Azalea fulfils certain performance criteria. In addition to the additional distribution, a bonus redemption amount of 0.5% of the principal amount is paid to bondholders on the mandatory call date. Investors ought to take note of this when comparing Astrea 8 Class A-1 bonds against its previous renditions.
  
  
• However, Astrea 8 has a lower maximum LTV ratio of 40%, as compared to previous issuances at 50%. We believe this is good news for bondholders as the lowered LTV cap would be more easily breached in the event of a PE market downturn. In such a scenario, additional distributions would be triggered earlier to pay towards the Reserves Account to restore the LTV ratio below 40%, prioritizing bondholders over equity investors.

A review of past Astrea issuances and our opinion of Astrea 8

Table 3: Outstanding Astrea bonds

Table 4: Details of past Astrea issuances

We find the new Astrea 8 Class A-1 SGD and Class A-2 USD quite attractive given their respective IPGs and strong credit ratings. With that said, for investors targeting the private placement tranche, we expect the final price guidance to adjust downwards from the IPG – especially in anticipation of a strong demand for Azalea’s offerings in the debt market.

Alternatively, for investors looking for a shorter tenor option, the Astrea VI Class A-1 - ASTLC 3.000% 18Mar2031 Corp (SGD) would be a great choice. Given the current reserves (at 71%) for Class A bonds and the ongoing pace of reserves accumulation, we expect the Astrea VI Class A-1 bonds to be redeemed early on its mandatory call date. In addition to the yield, investors will additionally earn a 0.5% bonus redemption of the principal amount (owing to the “Sponsor Sharing” feature on Astrea VI), which has not been included in the calculations of the stated yield to call.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) hold a position in ASTLC 6.000% 27May2032 Corp (USD) - Class B and ASTLC 3.250% 18Mar2031 Corp (USD) - Class A-2, and the analyst who produced this report hold a NIL position in the abovementioned securities.

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