Astrea 7 Bonds Review: Up to 6% p.a. Private Equity (PE) Bonds From Temasek-Owned Azaela

Heard of the Astrea series of Private Equity (PE) bonds and the previous Astrea VI PE Bonds tranche that was launched in March last year?

Well, here’s some good news.

Astrea 7 Pte. Ltd. and Azalea Investment Management Pte. Ltd. has just announced the launch of the newest tranche of Astrea PE bonds: the Astrea 7 PE Bonds.

Astrea 7 SGX

This time around, Azaela will open up the Astrea 7 Class A-1 Bonds (denominated in SGD) and Class B Bonds (denominated in USD) for subscription to retail investors (the public) in Singapore; only the fourth private equity retail bonds to be listed on the Singapore Exchange (SGX).

They will be offering S$280 million of Class A‑1 Bonds at a fixed interest rate of 4.125% per annum (p.a.), as well as US$100 million of Class B Bonds at a fixed interest rate of 6% p.a.

The Public Offer follows the successful placement of S$246 million of the Class A-1 Bonds, US$175 million of the Class A-2 Bonds and US$100 million of the Class B Bonds to institutional investors and accredited investors, which concluded earlier today.

Intrigued?

Here is what you need to know about the Astrea 7 PE Bonds!.

TL;DR: New Astrea 7 Bonds Review — Astrea 7 Private Equity Bonds Explained For Investors

*‘sf’ means ‘structured finance’, and does not change the credit ratings. The final credit ratings of the Bonds will only be assigned on or after the issue date.

Astrea 7 Information: Astrea 7 How to Apply / Astrea 7 Application / Astrea 7 How to Buy and Astrea 7 Allotment

A few things to take note of:

• Total US$755 million offering via three classes of bonds (Class A-1, Class A-2 and Class B)
• Class A-1 and Class A-2 rank equally (pari passu) as the most senior class of Bonds, Class B ranks junior to and are paid after Class A-1 and Class A-2 in terms of priority of payment
• Class A-1 Bonds are expected to be rated A+sf and A+ (sf) by Fitch and S&P [1], respectively
• Class A-2 and Class B Bonds are expected to be rated Asf and BBB+sf respectively by Fitch [1]
• This publication has not been reviewed by the Monetary Authority of Singapore.

Who is the Issuer? Explaining the Astrea Bond Temasek Link

An important thing to note is that the issuer of the Astrea 7 PE Bonds are Astrea 7 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 the development and innovation of 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 six in the series to date, with Astrea 7 being the latest addition to the Astrea Platform.

Astrea Bond 7 Bond Price: How is it Determined?

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

You are acting 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 7 PE Bonds are backed by cash flows from a diversified portfolio of 38 PE funds and their underlying companies. In total, this portfolio is worth about US$1.9 billion.

Here is more information about the PE funds:

Astrea 7 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.

It is important to note that the Class A-1 bonds are prioritised over Class B when it comes to payment.

These Astrea 7 PE funds are also diversified across Geography and sectors:

Also, the majority of these PE funds are more mature and able to generate cash flow and have a weighted average fund age of 5.3 years.

But one thing to note is that the amount of risk you are taking with the Astrea 7 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.

Also, as Class A-2 Bonds are not available to retail investors, I will not be diving deep into these bonds.

Astrea 7 Class A-1 Bonds Breakdown

The Class A-1 bonds are denominated in SGD.

Also, the Class A-1 Bonds belong to the most senior class of bonds that rank higher than the Class B Bonds.

These are investment-grade bonds which are expected to be rated “A+sf” by Fitch Ratings, Inc. (“Fitch”) and “A+ (sf)” by S&P Global Ratings (“S&P”).

In other words, Class A-1 Bonds have a comparatively lower credit risk profile compared to class B Bonds and will be paid first.

These Class A-1 bonds have a mandatory call after five years in 2027 and legal maturity of 10 years in 2032.

The mandatory call event will occur when the scheduled reserves for Class A-1 and A-2 bonds are sufficient to redeem all of the Class A bonds, and there are no outstanding Credit Facility Loans.

If the Class A-1 Bonds are not redeemed on their respective Scheduled Call Dates, their annual interest rates will step up one time to 5.125% after these dates.

Astrea 7 Class B Bonds Breakdown

Whereas Class B Bonds are bonds denominated in USD.

This means that your investment will be subject to exchange rate fluctuations between their investment currency base and the US$.

This may result in foreign exchange losses for these Class B Bondholders.

These are investment-grade bonds which are expected to be rated “BBB+sf” by Fitch.

Meanwhile, Class B bonds have a mandatory call after 6 years in 2028 and a legal maturity of 10 years in 2032.

The mandatory call event will happen when the cash set aside for the Class B reserves account is sufficient to redeem the Class B bonds, and there are no outstanding Class A bonds and Credit Facility Loans.

Otherwise, the interest rate on the Class B Bonds will have a one‑time step-up from 6% to 7% per annum after this date until the Class B Bonds are fully redeemed.

The Maturity Date of 27 May 2032 is the latest date on which all outstanding Bonds will be redeemed in full.

Astrea 7 Bond Risks

In an article for Bondsupermart, analyst Wang Hoong Wei highlighted the following risks (emphasis are mine):

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 five 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.

Astrea 7 Subscription: Yay or Nay?

Before you even decide to invest in the Astrea 7 PE bonds, I would recommend that you read the prospectus and do your due diligence on these bonds.

Also, do share your thoughts about the bonds and read what other savvy investors on Seedly might have to say about them: