Interest, Risk and More Info on These Private Equity (PE) Bonds From Temasek-Owned Azalea

Who is the Issuer? Explaining the Astrea Bond Temasek Link

It is important to note that the issuer of the Astrea 8 PE Bonds is Astrea 8 Pte. Ltd., an indirect wholly-owned subsidiary of Azalea Asset Management Pte. Ltd.

Also, Azalea is a wholly-owned subsidiary of Seviora Holdings, which is, in turn, wholly owned by Temasek.

The Azalea Group invests in private equity funds, focusing on developing and innovating new investment platforms and products to make private equity accessible to a broader group of investors.

One such innovation is the Astrea Platform, a series of investment products based on diversified portfolios of PE funds. It represents a phased approach to developing products for long-term-minded Singapore retail investors to co-invest in private equity with Azalea.

Started in 2006, there are seven in the series to date, with Astrea 8 being the latest addition to the Astrea Platform.

Astrea Bond 8 Bond Price: How is it Determined?

In essence, a bond is like a loan issued by a company or government to an investor.

You act like a “lender”, and the company or government acts as a “borrower”. Bonds are another form of investment option, just like stocks.

Bonds are commonly referred to as fixed-income securities. They work by paying back a regular amount, also known as the coupon rate, in return for the risk lenders take on.

Effectively, bonds are backed up by the issuing entity.

In contrast, the new Astrea 8 PE Bonds are backed by cash flows from a diversified portfolio of 38 PE Fund Investments.

As of 31 December 2023, the funds are invested in 1,028 companies spanning different regions, time periods, and sectors. The total Net Asset Value (NAV) of the portfolio stands at US$1,471.4 million.

Also, here is more information about the Bonds:

• Total portfolio Net Asset Value (“NAV”) is US$1,471.4 million

  • Fund Strategy: 76.4% Buyout, 23.6% Growth Equity

  • Fund Region: 63% U.S., 20% Europe, 17% Asia

• Range of Vintage Years: 2015 – 2020

• Top Three Fund Investments

  • Insight Venture Partners (Cayman) X, L.P.

  • Thoma Bravo Fund XIII-A, L.P.

  • CVC Capital Partners VII A L.P.

• Top Three GPs

  • Insight Partners

  • Permira

  • Silver Lake.

Astrea 8 will receive cash from its Transaction Portfolio of PE Funds when its underlying investments are sold. These cash inflows are then used according to the Priority of Payments to pay for its expenses, interest payments to bondholders and principal repayments.

These Astrea 8 PE funds are also diversified across Geography and sectors, with the top five sector groups at the investee company level in:

• Information Technology – 29.9%
• Industrials – 18.2%
• Health Care – 14.1%
• Consumer Discretionary – 12.2%
• Financials – 8.1%

Also, the majority of these PE funds are more mature and able to generate cash flow, with a weighted average fund age of 6.1 years:

However, one thing to note is that the amount of risk you take with the Astrea 8 PE Bonds is nothing to sniff at, as private equity funds often expect their companies to provide a 20% – 30% internal rate of return.

Also, private equity funds traditionally acquire their underlying companies with leveraged buyouts.

This is something to take note of.

That’s not all. For more insight, let’s examine both the Class A-1 and Class A-2 Astrea Bonds further.

Astrea 8 Class A-1 and A-2 Bonds Breakdown

Note that both Class A-1 Astrea 8 Bonds and Class A-2 Astrea 8 Bonds are ranked equally (pari passu) in terms of priority of payment.

As seen above, Fitch, a credit rating agency, has given the bonds an expected rating as follows: Class A-1 bonds have an A+ sf rating, and Class A-2 bonds have an A sf rating. This means that both bonds are investment grade, but the Class A-1 bonds are less risky.

In addition, here is how the different classes of bonds differ:

Astrea 8 Class A-1 SGD Bonds

The Class A-1 bonds have an interest rate of 4.35% p.a., a semi-annual interest payment, and a Mandatory Call scheduled for July 2029, contingent upon meeting specific conditions. If these bonds are not called, the coupon rates will increase by 1.0% per annum just once.

For the mandatory call to proceed, sufficient funds must be available in the Reserves Account and Reserve Custody Account to redeem the bonds, and there must be no outstanding loans from the Credit Facility.

Class A-2 USD Bonds

Pending certain conditions, the Class A-2 bonds have an interest rate of 6.35% p.a., a semi-annual interest payment and are scheduled for a Mandatory Call in July 2030. If these bonds are not called, the coupon rates will increase by 1.0% per annum just once.

For the mandatory call to be exercised, all Class A-1 bonds must be fully redeemed, in addition to meeting the same conditions required for the redemption of Class A-1 bonds.

Astrea Bonds Historical Performance

Astrea Bonds have consistently demonstrated a dependable history of meeting redemption obligations:

• Astrea III (2016), Astrea IV (2018), and Astrea V (2019) were all redeemed on their respective callable dates.
• Astrea VI (2021) and Astrea 7 (2022) have accumulated 75% and 41% of their respective reserve accounts.

These reserve accounts are mandated to hold cash to ensure enough reserves are available to redeem the bonds on the call date.

Fitch, a credit rating agency, has given the bonds an expected rating: Class A-1 bonds have an A+ sf rating, and Class A-2 bonds have an A sf rating. This means that both bonds are investment grade, but the Class A-1 bonds are less risky. You can read more about the Astrea 8 bonds Fitch rating here.

Astrea 8 Bond Risks

Here are some of the risks of the Astrea 8 Bond you should be aware of:

• Firstly, the performance of the underlying funds can fluctuate greatly, and returns are not assured despite stress testing. Investors should understand that stress testing scenarios are not entirely comprehensive, leading to potential unpredictability in the timing and reliability of cash distributions.
• Secondly, Astrea bonds are susceptible to market risks. Negative shifts in the macroeconomic environment can adversely impact the bonds. For instance, during the pandemic sell-off in March 2020, some earlier Astrea issuances experienced a bond price decline of over 10%. Economic downturns, worsening geopolitical conditions, and natural disasters can decrease PE asset valuations and deal activities, resulting in fewer distributions from fund investments. As seen with previous tranches, persistent high interest rates could cause the bond price to drop.
• Thirdly, a significant part of the portfolio comprises buyout funds, which might use debt in leveraged buyout strategies. Deteriorations in the conditions of investee companies can lead to substantial losses in the portfolio, and high interest rates could amplify these losses.
• Typically, investors receive limited information about the underlying PE funds and their investee companies. Asset-owning companies may possess financial or other confidential information that cannot be disclosed to public investors. Consequently, investors may not have access to the underlying funds’ complete details and financial performance.
• Reinvestment Risk: While the ability to call the bond in past years was beneficial, a declining interest rate environment can disadvantage investors. The issuer might call the bond and refinance at a lower rate, leaving investors with reinvestment risk, making it harder to find a good deal when that time comes.
• Class A-2 bond investors should also be mindful of potential exchange rate risks. As these bonds are USD-denominated, they are subject to exchange rate fluctuations. Investors may receive lower distributions and returns if the SGD appreciates against the USD.

Astrea 8 Subscription: Yay or Nay?

Before you even decide to invest in the Astrea 8 PE bonds, I would recommend that you read the prospectus and do your due diligence on these bonds.

How to Apply for Astrea 8 Bonds

Applications for the Astrea 8 Bonds for the public open tomorrow, 11 July 2024 at 9am via DBS/POSB, OCBC and UOB ATMs, mobile banking and internet banking websites: