The great Astrea vacuum

In this issue:

• Azalea launches new tranche of Astrea bonds
• Johor Plantations makes a good first impression

Greetings dear reader,

If you’re a yield-hunting retail investor, last week was probably a happy week. Temasek-owned Azalea Investment Management launched its latest tranche of private equity-backed bonds, Astrea 8, for public subscription.

The public offer consists of two classes:

Class A-1 bonds are denominated in Singapore dollars and will pay 4.35 per cent per annum Class A-2 bonds are denominated in US dollars and will pay 6.35 per cent per annum

This public offer follows the placement of both classes of bonds to institutional and accredited investors that had collectively placed orders for S$1.2 billion worth of bonds.

The final placement amount was S$260 million in Class A-1 bonds and US$150 million in Class A-2 bonds. The public offer consists of S$260 million in Class A-1 bonds and US$50 million in Class A-2 bonds. This represents a total of S$520 million in Class A-1 bonds and US$200 million in Class A-2 bonds – a total of S$790 million that will be locked up for up to 15 years.

There are pros and cons to this, which I will dive into. I also take a closer look at the Malaysian market.

What’s happening?

The Astrea series of bonds, as my colleague Genevieve Cua writes, have “built a strong track record of credit rating upgrades and steady distributions. Even through the Covid-19 pandemic, for example, the Astrea IV and V portfolios generated sufficient cash flows to fulfil all bond obligations, and their credit facilities were not utilised.”

They also pay attractive coupons. As my colleague Genevieve points out, 12-month fixed deposits pay between 3 and 3.5 per cent a year. The latest Singapore Savings Bond yields an average of 3.22 per cent annually over 10 years. The 10-year Singapore government bond currently yields around 3.2 per cent.

Azalea’s higher returns are derived from private equity investments. The Astrea 8 issuance, for instance, is backed by a portfolio of 38 private equity funds holding more than 1,000 companies. Azalea, as sponsor, absorbs any initial losses – the portfolio will need to lose 60.2 per cent of its value before bondholders are affected.

The yield generated by this structure has made the Astrea bonds an incredibly popular investment. The Astrea 7 tranche, released in 2022, received subscriptions to the tune of over US$2 billion for US$755 million worth of bonds. To date, there is an estimated US$1.45 billion of outstanding Astrea issuances.

Why it matters?

For fund managers, or anyone who makes money selling investment solutions, the Astrea bonds represent serious competition.

Fortunately, supply is somewhat limited. In 2022, more than 75 per cent of the S$526 million in Class A-1 bonds was allocated to retail investors who applied for less than S$50,000. Those who applied for S$9,000 or less received full allocations. Of the US$200 million of Class B bonds on offer, 73 per cent was allocated to those who applied for less than US$50,000. Those who applied for US$25,000 or less received full allocations.

Nevertheless, money invested in Astrea bonds is money that won’t be allocated to other things – such as Singapore stocks. The Astrea V tranche was redeemed earlier this year. If that money isn’t already in T-bills or other similar yield instruments, it will probably be pumped into Astrea 8.

This isn’t necessarily a bad thing. Astrea’s bonds may be helping retail investors get used to the idea of setting aside some of their salary for investing, as Astrea bonds cannot be purchased with monies in the Central Provident Fund.

That they are backed by private equity could also help investors – and the relevant regulatory authorities – get comfortable with private equity investments.

Long thought of as too risky for retail investors, private equity is gradually developing a reputation as a more efficient form of investment.

At a recent investment event I attended, one private equity manager made the case that private equity represents a superior model of ownership. Public equity ownership is too disparate, he said. In private equity, it is easier to hold boards and management to account.

As Azalea builds its track record, could an opening emerge for other private equity instruments that allow retail participation? Also, what will happen to publicly listed stocks as private equity gains traction?

Public markets are still valuable, I think. Companies that are listed do, however, need to make a better case to investors. Stocks need to be sold.

The big number: 10.7%

That is how much shares of palm oil producer Johor Plantations Group managed to climb on their first day of trading on Bursa Malaysia.

The counter ended the day 7 per cent above its offer price of 84 sen. It closed Friday (Jul 12) at 88 sen, or 4.8 per cent higher.

That debut seems decent given what happened in Hong Kong last week. Ride hailing company Chenqi Technology opened down 14.3 per cent, and technology services company Shanghai Voicecomm fell 15.4 per cent in early trade.

Some of the positive sentiment may be stock or sector-specific. Johor Plantations’ IPO is the largest in Malaysia since March 2022.

Recent data also indicates crude palm oil prices will trend higher this year, according to analysts at UOB Kay Hian. “The increase in palm oil inventory is slow and is likely to remain at the current level for the next few months in view of slower production growth,” they said in a Jul 11 report.

At the same time, there is growing optimism about the Malaysian economy. Barnabas Gan, economist and research head at RHB, expects Asean’s GDP to accelerate this year, driven by Vietnam, Indonesia and Malaysia. His forecasts for GDP growth in these countries are 5.9 per cent, 5 per cent and 4.6 per cent, respectively.

5 big reads

• Is it time to load up on S-Reits? Caution is warranted in higher-rate environment VALUATIONS of real estate investment trusts are close to two standard deviations below their 10-year average, making them seem attractive. Here’s why you should be wary.
• Rich Chinese return to Hong Kong as Singapore steps up scrutiny HONG Kong is winning back wealthy Chinese by rolling out the red carpet for the rich while rival Singapore scrutinises foreign money.
• China ‘cannot be ignored’: Temasek reshaping China portfolio from export to domestic-driven companies TEMASEK’S one-year portfolio returns were dragged down by China, but deputy chief executive Chia Song Hwee expects some adjustments to moderate the downside.
• Volatility in commodity prices likely to rise in run-up to US election GOLD and oil are typically a hedge against uncertainty, but currency fluctuations may complicate matters.
• Asia’s rising private markets create demand for training from talents seeking an edge INVESTMENT bankers, public equity managers and other finance professionals are finding opportunities elsewhere as public market activity fades.