Temasek unit to issue PE-backed bonds targeting retail investors

Singapore

THE Azalea Group, a Temasek subsidiary, is launching a private equity bond with a tranche targeted at retail investors, a structure which is believed to be a first in the world.

The group hopes to raise a total of about US$500 million from the bond issuance. The retail tranche of S$242 million will be available for subscription through ATMs for a minimum investment of S$2,000.

The preliminary prospectus for Astrea IV was lodged yesterday on the Monetary Authority of Singapore's OPERA site. The Business Times understands that a roadshow for institutions will begin today, which marks the start of a bookbuilding process to ascertain demand and interest rates. The process may take one to two weeks.

Private equity is an asset class typically accessible only to institutions or ultra wealthy private clients. This is because the asset class, which offers exposure to private companies, is illiquid and the holding period could be as long as 10 years. Despite this, interest has surged in recent years as investors seek higher returns from non-traditional sources. Preqin estimates that assets under management in private equity have grown 11 per cent a year since December 2000, and have hit US$4 trillion as at September 2017.

Astrea IV's structure is broadly similar to Astrea III, a PE bond it launched in 2016. Astrea III's three listed tranches were available only to accredited investors. About US$510 million worth of bonds were issued under Astrea III, which was eight times subscribed.

Astrea IV is backed by a diversified portfolio of 36 funds invested in more than 590 companies in a range of industries, including consumer, IT, healthcare and financials. In aggregate, the funds have a weighted average vintage of 2011 and are valued at about US$1.09 billion. Undrawn commitments come to around US$168 million.

Astrea IV will list three tranches, each designed to target a particular risk appetite. The least risky tranche is Class A-1 retail bonds which are expected to be rated Asf by Fitch. "sf" denotes the rating for structured finance.

Class A-2 bonds are expected to raise US$210 million, and Class B US$110 million.

The scheduled maturity for Class A-1 and A-2 bonds is five years. This corresponds to the scheduled call date in 2023. Investors, however, will be free to sell their holding on the stock exchange.

A fixed coupon will be paid every six months. Class A-1 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.

The final maturity of the bonds is in 10 years or 2028. If the Class A-1 bonds are not redeemed in full in 2023, there will be a one-time step-up interest rate of 1 per cent per annum.

There are a number of ways that the structure seeks to mitigate risk. One is that the underlying funds are fairly mature, with a weighted average fund age of seven years. This suggests that some funds would have started to make distributions which will be available to fund coupon payments.

A typical private equity fund tends to show negative cash flow in the early years due to drawdowns to fund investments. Cash flow should eventually turn positive as portfolio companies are sold at a profit.

The structure also has secured 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.