Here’s what you should know about the Astrea 7 bonds

1.    Reserves Accounts

Besides having a well-diversified portfolio, there are also a number of structural safeguards in the Astrea 7 bonds to help repay the principal amounts to bondholders. Firstly, there are scheduled reserves for the Class A-1 and A-2 bonds during the 5-year non-call period to ensure that the issuer has sufficient capital to redeem the bonds on their call dates. The issuer shall pay SGD 55.5m to the Class A reserves account on each Distribution Date until the Scheduled Call Date. If there is any shortfall on the Distribution Date, the unpaid reserve amount shall be carried forward to subsequent Distribution Dates until it is paid in full.

No further payments will be made to the Class A reserves account once the cap is reached. The Class A reserves account will be used to redeem both the Class A-1 and A-2 bonds on their call dates. However, if the reserves account is insufficient to redeem all Class A bonds, the Class A-1 bonds will be redeemed in full first. The balance will be used to redeem part of the outstanding amount of the Class A-2 bonds, while on each subsequent interest payment dates where there is cash available, the issuer shall redeem the remaining amount of the Class A-2 bonds.

As for Class B bonds, 90% of available cash flows will flow into the Class B reserves account upon the earlier of: 1) full redemption of Class A bonds or 2) Class A reserves account reaching its cap. Similar to Class A bonds, once the Class B reserves account limit is reached, there will no longer be payments made to the reserves account, and the reserves account will be used to redeem Class B bonds on its scheduled call date.

It is also worth noting that payments for both Class A and B reserves account could be accelerated either through a trigger of the maximum loan-to-value (“LTV”) ratio or the exercise of disposal option by the manager. The maximum LTV ratio permissible is 50% as long as any bond remains outstanding. In terms of its funding structure, USD 755m out of USD 1.9b of NAV is taken up by the Astrea 7 bonds, while the remaining USD 1.18b is equity 100% owned by the sponsor (Astrea Capital 7 Pte. Ltd.), thus, providing a strong alignment of interest with bondholders. The current LTV ratio is ~39.6%, which is defined as the proportion of net debt over NAV.

In the event when the LTV ratio exceeds 50%, cash will be diverted to the Class A reserves accounts until the reserve cap is reached, and thereafter to Class B reserves until the cap is met. If the Class A-1 bonds have been redeemed, cash will be diverted to the repayment of Class A-2 bonds, and thereafter to Class B reserves account.

The manager (Azalea Investment Management Pte. Ltd.) may also opt to exercise its disposal option, where it can sell up to 15% of the aggregate portfolio NAV as of the initial portfolio date. Net proceeds from the disposal shall be paid into the Class A and B reserves accounts based on the priority of payments.

2.    Credit Facility

The issuer may draw on the credit facility for various funding needs such as capital calls, interest expenses and management fees in the event of cash flow shortfalls. Under the conditions of the facility agreement, total amount available for the credit facility shall not exceed USD 300m at any time. The credit facility provider will be obliged to provide a loan to the issuer as long as there is no continuing or potential event of default from the proposed loan and certain representations made by the issuer are true in all material respects.

So far, the previous Astrea bonds have not tapped into their credit facilities, demonstrating their healthy liquidity positions and strong portfolio performances among the underlying PE funds. As of December 2021, Class A bonds of Astrea IV have been fully reserved 18 months ahead of schedule, while Class A bonds of Astrea V are more than 50% reserved based on their latest semi-annual bondholders’ distribution report.  

3.    Currency Hedges

The issuer has entered into various currency hedging arrangements to reduce the impact of exchange rate volatilities and fluctuations. Approximately 55% and 27% of the portfolio NAV are exposed to the US and Europe respectively. Since the principal amount of the Class A-1 bonds is payable in SGD, the issuer has entered into a series of fixed forward contracts for the purchase of SGD equivalent to a 100% of the principal amount of Class A-1 bonds against USD on its scheduled call date.

As for EUR-denominated distributions, the issuer has entered into fixed forward contracts ranging in tenor from 6 months to 6 years. However, it is worth noting that the Euro fixed forward contracts will not fully hedge against the EUR-denominated fund investments, hence, the portfolio NAV could still be subjected to currency fluctuations. Roughly 65% of the EUR-denominated funds are hedged. 

c) Stress test results

To determine whether the transaction portfolio is able to satisfy the debt obligations of the Astrea 7 bonds, the issuer has commissioned Bella Research Group to perform an independent analytical study of the transaction. The simulations replicate the portfolio in terms of fund age distribution, fund count, and starting NAV, and they were run using different constraints. Cash flows from each PE fund portfolio were subsequently simulated through a “waterfall” structure, representing the priority of payments of the transaction.

There were 4 different scenarios in the stress test, namely the Base Case, Reduced Distributions, Below Median, as well as GFC and Reduced Distributions. In the Base Case scenario, the portfolios were unconstrained and comprised of PE funds drawn from the entire universe of available PE fund data to simulate historical industry performance. Meanwhile, the Reduced Distributions case assumes that all quarterly gross distributions are cut by 50% for the first 2 years and then by 25% thereafter to simulate a severe macroeconomic shock followed by permanently weaker capital markets.

For the Below Median scenario, Bella Research Group has limited the sample of PE funds to those that are performing below the median. Lastly, for the GFC and Reduced Distribution scenario, the simulated portfolio launch years are restricted to 2005, 2006, 2007 and 2008 while all quarterly gross distributions are reduced by 50% in the first 2 years followed by 25% thereafter to simulate conditions seen following the GFC.

Table 1: Percentage of portfolios that will meet principal repayment obligations

As seen from Table 1, the results of the stressed cash flow analysis concluded that almost all of the simulated PE fund portfolios are able to generate sufficient cash flows to repay bondholders by their maturity dates in 2032. As for Class A-1 bonds, almost all of the simulated portfolios are able to generate enough cash flows to meet the principal repayment obligations by its scheduled call date in 2027. 

Investment Risks

Despite being well-diversified across regions and sectors with embedded structural safeguards, there are still associated risks with investing in the Astrea 7 bonds. Firstly, the performance of the underlying funds is highly variable and there is no guarantee of returns despite stress testing. Investors should understand that the stress testing scenarios and results are not entirely exhaustive, and consequently, the timing and certainty of cash distributions may be unpredictable as well.

Secondly, the Astrea bonds are subject to market risks, where adverse changes in the macroeconomic environment could have a negative impact on the bonds. For instance, during the pandemic sell-off in March 2020, some of the previous Astrea issuances had experienced a significant drawdown of more than 10% in their bond prices. Changes in market conditions resulting from adverse economic conditions, worsening geopolitical outlook and natural disasters could result in a decline in PE asset valuations and deal activities, thus leading to less distributions from the fund investments.

Thirdly, a majority of the portfolio belongs to buyout funds, which are likely to use debt if they employ leveraged buyout strategies. As such, deteriorations in the conditions of investee companies could result in substantial losses to the portfolio, while the rising interest rate environment could potentially worsen such losses.

Typically, investors will receive limited disclosures regarding the underlying PE funds and their investee companies. The asset-owning companies could possess financial or other confidential information that is not permitted to be revealed to public investors. Therefore, investors may not be able to access the full run-down and financial performance of the underlying funds.

Lastly, with the rising rate environment, this could have a negative impact on bond prices as they are inversely correlated to interest rate movements. We consider the bonds to have a medium-term tenor, given that the bonds have a mandatory call event after year 5 for Class A and year 6 for Class B bonds as long as the conditions are fulfilled. Furthermore, Class A-2 and B bond investors should also take note of the potential exchange rate risks, given that the bonds are USD-denominated and they will be subjected to exchange rate fluctuations. If SGD appreciates against the USD, investors might end up earning lower distributions and returns. 

Conclusion

In a nutshell, the Astrea 7 bonds are well-diversified across a portfolio of PE funds with structural safeguards to protect the interests of bondholders. For the first time ever, retail investors can gain exposure to the Class B bonds that offer higher yields, but they should note that the junior tranche is usually riskier as compared to the senior Class A bonds due to the lower priority of payments. With a high probability of repayment by maturity across all bond classes, investors can gain access to PE exposure with limited downside risks. Therefore, investors looking for stable-income options may consider the Astrea 7 bonds.

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