Pandemic prompts 'de-risk' of Astrea IV structure to safeguard future bond redemption

MORE money has been set aside for the future redemption of Temasek-owned Azalea Group's Astrea IV Class A bonds, in a bid to "de-risk" the structure during the coronavirus pandemic.

Some US$53 million was added to the reserves accounts, on top of a scheduled US$40 million and another US$1 million that was paid in to manage the portfolio's loan-to-value (LTV) ratio.

When the LTV threshold of 50 per cent is crossed as portfolio value declines - which happened during the six-month distribution period to June 14 - any cash due to the sponsor is moved into the reserves accounts or to redeem outstanding Class B bonds instead.

"With the uncertainty over how long the pandemic may last or when the disruptions may end, the sponsor has deemed it prudent to de-risk the Astrea IV structure," Azalea said in an update to bond holders released on Monday.

"It has requested the manager to direct cash otherwise due to itself under the priority of payments on this distribution date to accelerate the reserving of amounts in the reserves accounts."

Still, Azalea added: "For the current distribution period, the structure has received sufficient cash to service its bond obligations."

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That was even as it noted that private equity (PE) assets in the Astrea IV portfolio "have not been spared" by the global economic and business disruption from the deadly virus outbreak.

"If the divestment slowdown continues, the PE funds will generate less distributions for Astrea IV to service its bond obligations," Azalea warned in its bourse filing.

While cash flows for the Astrea IV PE funds come from the sale of portfolio companies, the manager cannot predict the divestment activities of the PE funds amid the pandemic.

Azalea added that if there are not enough cash flows in future distribution periods, key bond obligations will be serviced through safeguards such as drawing on existing bank facilities to pay for senior expenses and interest expenses, as well as deferring unfilled scheduled reserves.

The issuer had a liquidity facility of US$100 million as at June 1, as well as a capital call facility of US$106 million. Bank facilities were not drawn down during the latest distribution period.

With the latest top-ups, the reserves accounts had a balance of US$209 million as at June 14. Including what has been paid into the reserves accounts, the LTV ratio stood at 42.4 per cent.

The PE-backed Astrea IV bonds carry an annual coupon of 4.35 per cent for the Class A-1 tranche, 5.5 per cent for the Class A-2 tranches and 6.75 per cent for the Class B tranche. The S$121 million retail offering of the A-1 bonds was 7.4 times subscribed at its launch in June 2018.