Azalea Asset Management will be listing the Astrea 8 private equity (PE) bonds in July. This is the fifth listed retail bond that gives retail investors in Singapore access to the PE asset class. Astrea 4 was the first such bond available to Singapore retail investors and was launched in June 2018.

Who is Azalea

Azalea Asset Management is indirectly wholly owned by Temasek Holdings. Azalea invests in private equity with a focus on the development and innovation of new investment platforms and products to make PE accessible to a broader group of investors.

The total offering size of the Astrea 8 bonds is approximately US$585 million. The figure comprises US$370 million worth of Class A-1 bonds and US$215 million worth of Class A-2 bonds. Both classes are ranked equally in terms of priority of payment.

The public offer for Class A-1 bonds is S$250 million, while the public offer for Class A-2 bonds is US$50 million.

How to apply for Astrea 8 Bonds?

If you are interested in Astrea 8, you can apply via ATM, Internet banking, or mobile banking of DBS (including POSB), OCBC and UOB. The minimum amount in their respective currencies is $2,000, and applications must be in multiples of $1,000.

Key application details to note:

• Application start date: Thursday 11 July 2024, 9am
• Application close date: Wednesday 17 July 2024, 12pm
• Bond issue date: 22 July 2024 (Trading starts on SGX-ST)

For more information, you can take a look at the prospectus here. There is also a hotline to call for queries at the following banks:

• DBS Bank: 1800 111 1111
• POSB: 1800 339 6666
• OCBC: 1800 363 3333
• UOB: 1800 222 2121

There is a non-refundable administrative fee of S$2 paid by the applicant for each application.

Please also ensure that you submit only one valid application for a class of Bonds under its public offer. This means that you can apply once each for Class A-1 Bonds and Class A-2 Bonds.

How much can I be allocated?

Depending on demand, Astrea 8 plans to allocate valid applications as follows:

a) all applications of less than S$50,000 for Class A-1 Bonds or less than US$50,000 for Class A-2 Bonds will be allocated in full or in part; and

b) applications of S$50,000 or more for Class A-1 Bonds or US$50,000 or more for Class A-2 Bonds will be balloted, with successful applicants allocated in full or in part.

This means that if you want to be guaranteed an allocation, your application needs to be less than $50,000 in the respective currencies.

Salient details of Astrea 8 PE bonds

Astrea 8 PE bonds are backed by cash flows from a portfolio of 38 PE funds managed by 27 reputable general partners.

As of Dec 31, 2023, these funds invest in 1,028 companies across various regions, vintages and sectors. The total portfolio net asset value (NAV) for these funds is US$1.47 billion, with a fund strategy of 76% buy out and 24% growth equity. The funds are mostly based in the US (63%), followed by Europe (20%) and Asia (17%). The vintage years range from 2015 to 2020.

The 1,028 companies are across multiple sectors, with IT accounting for 30% as shown in the snapshot below.

What is Private equity?

Private Equity generally refers to the asset class where equity positions are acquired in private companies or in publicly traded companies that may be acquired and privatised as a result of a PE transaction.

PE Funds are typically close-ended and managed by professional PE Fund managers. In general, PE Funds generate their returns by proactively making improvements in an investee and utilising various strategies, such as helping the investee improve its operations and its capital structure.

Some PE Funds acquire majority ownership positions in an Investee Company in order to exercise meaningful control of the investee’s board, governance, and operations.

PE Funds tend to hold their investments for several years, as a longer time is required to realise the benefits of improvements in the Investee Companies. The holding period for each investment made by PE Funds is typically between 3 to 7 years.

Why does Azalea issue bonds?

Azalea issue bonds to diversify its funding source as well as to achieve an optimal capital structure. Companies can issue bonds for a duration that is aligned to their investment timeframe. In this case, Azalea is issuing bonds for at least 5 years, with a maximum length of 15 years.

Bond financing is also often less expensive than equity and does not entail giving up any control of the company.

Is the bond capital protected?

The bond is not capital protected, therefore there is risk to this investment.

The risk arises from the underlying performance of the fund which is subjected to investment, market and leverage risk. Additionally, Class A-2 bond is in US$, therefore investors who converts their S$ to invest will also be subject to exchange rate fluctuations.

There are 3 structural safeguards in place, as listed below. Additionally, the initial loan to value is slated to be below 40%.

1) Reserve accounts: Cash build-up to repay principal amounts

2) Maximum Loan to Value Ratio: Crossing the debt level limit of 40% triggers the lowering of total net debt.

3) Credit facility: In place to fund certain expenses and capital calls for fund investments if cash flow shortfall occurs.

The above chart shows a simplified illustration of the priority of payment for bondholders.

Although both Class A-1 and ClassA-2 Bonds rank equally to each other, cash being built up will be first reserved to repay the principal of Class A-1 Bonds.

Capital gain opportunity

Yes the bond is not capital protected, however, this means there is an opportunity for capital gains.

The Astrea PE bonds have enjoyed multiple credit rating upgrades since issuance, as illustrated in the diagram below. The rating upgrades reflect the improved credit quality of the Astrea PE bonds that is underpinned by the Astrea portfolios’ quality, resilient performance, healthy loan-to-value ratios and the regular accumulation of cash reserves, which has helped to de-risk each Astrea transaction progressively over time.

The upgrades also reflect the rating agencies’ view that the Astrea PE bonds can withstand large declines in their transaction net asset values without affecting their respective ratings, and the Astrea portfolios’ strong liquidity positions, which have allowed them to continue meeting capital calls, expenses, and interest, even if distributions were to decline. In the agencies’ rating analyses, the Astrea portfolios performed well and better than the stress scenarios.

When does the bond mature?

There is a scheduled call date for Class A-1 bonds on July 2029, while the scheduled call date for Class A-2 bonds is on July 2030.

If the Class A-1 and Class A-2 bonds are not redeemed on their respective scheduled call dates, there will be a one-time 1.0% per annum step-up in the respective rates.

Both the Class A-1 bonds and Class A-2 bonds will legally mature in July 2039.

It is mandatory for Astrea 8 to redeem both bonds on their respective call dates if several conditions are met.

For Class A-1 bonds, the bonds need to be redeemed if the cash set aside in the reserves accounts and reserves custody accounts are sufficient to redeem the bonds. There also needs to be no outstanding credit facility loan.

For Class A-2 bonds, there needs to be no outstanding Class A-1 bonds to be redeemed; the cash set aside in the reserves accounts and reserves custody accounts also need to be enough to redeem the bonds. Like the Class A-1 bonds, there needs to be no outstanding credit facility loan.

Conclusion

Looking at the Astrea bonds traded on 5 July 2024, we can see that the recent Astrea bonds trade close to par. They have provided stability and regular returns to investors to date. The underlying investment is also well diversified as compared to an investment in one listed company bond.

However, it must be made aware that there are a range of investment and market risks which are unique to a PE investment, which are also applicable to even the bondholders.