Astrea IV private equity bonds' retail tranche interest rate set at 4.35% pa

THE Azalea Group, a Temasek unit specialising in investments in private equity, has launched its first PE-backed bond for retail investors, with a smaller-than-expected retail tranche of S$121 million.

The retail tranche of Class A-1 bonds carries an interest rate of 4.35 per cent. Subscription starts tomorrow and closes on June 12. Retail investors may subscribe via ATM with a minimum investment of S$2,000.

The bonds are expected to be issued on June 14, and are expected to begin trading on SGX on June 18. The total size of the A-1 tranche is S$242 million. Half of that, however, is a placement tranche that was marketed to institutions and accredited investors.

The tranches offered to institutions and accredited investors comprised S$121 million of A-1 bonds, US$210 million of A-2 bonds and US$110 million of Class B bonds. A-2 bonds carry an annual interest rate of 5.5 per cent, and B bonds have an interest rate of 6.75 per cent.

In a statement yesterday, Azalea said the overall demand for Astrea IV was strong despite broader market volatility. The issuer received a combined placement orderbook in excess of US$1.8 billion equivalent from over 100 accounts.

Samuel Chan, capital markets head at Standard Chartered Bank, said: "The market environment today is very different from that of 2016 as rising rates risk weighs highly on every investment decision. A 4.5 times subscription today is a rare positive outcome as most SGD deals are seen to struggle to even achieve 2-3 times cover. We expect strong interest and uptake from retail investors."

Earlier this week, Temasek Holdings chief executive Ho Ching referred to the Astrea IV offering as a way to help enhance individuals' retirement savings. "By creating a product which is diversified, and therefore provides a better risk-adjusted return for the individual, we can bring a new category of product to the market for the retail investor," she said.

Margaret Lui, chief executive of Azalea Investment Management, said: "We are excited to bring this unique groundbreaking investment product to the Singapore retail market... Over time we hope to offer more innovative products based on private assets to investors."

Astrea III in 2016 attracted US$510 million and was eight times subscribed. It marked the first time the bonds were listed on SGX.

The innovation of Astrea III and IV is that the bonds are structured in tranches to cater for various grades of investors' risk appetite and investment horizon. In this latest series, the underlying PE portfolio is valued at US$1.09 billion and is invested in 36 funds giving exposure to nearly 600 underlying portfolio companies. The largest fund - Blackstone Capital Partners VI - has a 9.2 per cent share of the portfolio. Over 86 per cent of the NAV is invested in the buyout strategy which historically has achieved the highest median net IRR (internal rate of return) of 14 per cent, based on Preqin data.

PE funds invest in private companies and are typically only accessible to ultra high net worth clients or institutions, due to the high minimum investment required and a long lock-up period of up to 10 years. Performance among funds also varies widely. While industry data may show an attractive long term rate of return in double digits, the risk of picking a poor performing fund is high. Azalea has sought to mitigate risk by investing in more mature funds which are likely to have begun to make distributions. The weighted average vintage of the underlying funds is 2011 for Astrea IV.

Class A-1 bonds are expected to be called in five years. Bondholders will receive a bonus payment of 0.5 per cent of principal at redemption if the sponsor - Astrea Capital IV - receives 50 per cent of its equity investment of US$313 million on or before the scheduled call date.

If Class A-1 and A-2 bonds are not redeemed in full in Year 5 at their scheduled call date (June 14, 2023), their interest rates will be subject to a one-time step-up of 1 per cent per annum until the bonds are fully redeemed.

A number of safeguards are built into Astrea IV to instil confidence that the coupons and principal will be repaid. There is, for instance, a liquidity facility to cover senior payments and interest payments should there be cash flow shortfalls. There is also capital call facility. The debt level limit is set at 50 per cent. Reserve accounts are also set up to enable the issuer to build up reserves for the redemption of all Class A-1 and A-2 bonds on the scheduled call date. Class A-1 and A-2 bonds are expected to be rated Asf by Fitch.

Read More: Astrea IV PE backed bonds: Looking after retail investors' interests