New issuance of Astrea PE-backed bonds launched; interest rates to be decided

AZALEA Asset Management, an indirect subsidiary of Temasek Holdings, is launching a new series of bonds backed by private equity (PE), of which S$250 million is expected to be open for retail subscription.

The indicative total size of the new issuance - called Astrea VI - is US$643 million. This is around 44 per cent of the underlying PE portfolio valued at US$1.45 billion.

The indicative size of lowest risk tranche of Class A-1 bonds is S$375 million, comprising S$250 million for the Class A-1 public offer and a placement of another S$125 million for institutions and other investors.

The indicative size of Class A-2 bonds is US$228 million, and Class B bonds US$130 million. Class A-2 and B bonds are for institutions and accredited investors. Like previous issues, there is a mandatory call after five years in 2026 and a legal maturity of 10 years in 2031.

The preliminary prospectus for Astrea VI was lodged earlier on Thursday at the Monetary Authority of Singapore's Opera site. As like earlier offerings of Astrea bonds, a bookbuilding process will ensue to ascertain demand and interest rates.

Based on the tentative timeline in the prospectus, the issue is expected to open for applications on March 10, and close on March 16. The minimum application for retail is S$2,000. Trading on the Singapore Exchange starts March 19.

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Azalea invests in PE, and manages around US$5.6 billion in assets. The firm has set out to open up access to PE for retail investors, in the hope of enhancing their long-term savings. The firm has issued PE-backed bonds in its Astrea platform since 2006. Astrea IV in 2018 was the first to include a retail tranche.

The big unknown that investors will seek are the interest rates for Astrea VI, particularly for the retail Class A-1 bonds. Based on a Q&A posted following Azalea's Investor Day conference in January, the manager said institutions are likely to consider the interest rate outlook and quality of issuance to determine the issues' interest rates.

So far, interest rates at launch of earlier issuances indicate a downtrend. Astrea IV's Class A-1 bond carried an annual interest rate of 4.35 per cent. The rate for Astrea V's Class A-1 bonds was 3.85 per cent in 2019. There was no issuance last year.

While Astrea VI, like previous issuances, is structured with safeguards to ensure payment of coupons and principal, it is not impervious to the impact of Covid-19. It is also not guaranteed.

The prospectus said the underlying "transaction portfolio" was affected by a fall in asset value in the initial phase of the Covid-19 outbreak. "The asset value has since recovered, and made gains for the eight months ended Nov 30, 2020 with net cash distributions received from the Transaction Portfolio in excess of US$140 million.

"As the Covid-19 pandemic is ongoing and its ultimate impact uncertain, the risks of possible adverse impact to the transaction portfolio remain."

The prospectus said adverse macro economic or market conditions could reduce deal activity. This could cause the portfolio to receive less distributions if exits on investee companies occur in a period of declining asset valuations.

Astrea IV and V have proved resilient in terms of trading values. At its lowest point in mid-March last year, Astrea IV fell to 99 Singapore cents. It closed on Feb 25 at S$1.057. Astrea V fell to 95 Singapore cents in mid-March last year. It was last traded at S$1.042.

Astrea's annual report 2019/20 said the sponsors have deemed it prudent to de-risk Astrea IV and Astrea V, even though there is sufficient funds for the distribution periods in June 2020.

The sponsors directed the manager to direct cash that was due to them under the priority of payments to the reserve account instead. This reduced the net debt positions of Astrea IV and V.

Astrea VI's PE portfolio comprises 35 funds. It is 81 per cent invested in buyout strategy, and the balance is in growth equity. The weighted average fund age is 5.8 years.

Its safeguards are similar to previous Astrea issuances. These include a priority of payments requiring cash to be set aside in a reserve account to ensure that there is enough cash for redemption of Class A-1 bonds. A credit facility is available to fund certain expenses, certain amounts payable and capital calls. The structure also stipulates a maximum loan-to-value ratio, with a process to ensure it is not exceeded.