Astrea’s portfolio construction principles and key product features
WE REFER to the Financial Times article by Kaye Wiggins, “Collateralised fund obligations: How private equity securitised itself”, reproduced by The Business Times on Nov 25. We thank the writer for highlighting the credit strengths of the Astrea Private Equity (PE) Bonds.
Your readers may be interested in the portfolio construction principles and key product features of the Astrea PE Bonds, that have enabled investors to have exposure to investment-grade bonds backed by PE cash flows.
Well-diversified portfolio
The Astrea PE Bonds are each backed by cash flows from a large, diversified pool of more than 30 seasoned PE funds underpinned by 600 to 1,000 companies at launch. This level of diversification offers good cash flow protection for bondholders, even if some companies should underperform.
Structural safeguards
To better protect bondholders’ interests, assets for each Astrea issue are ringfenced in a collateralised fund obligation (CFO) structure.
The Astrea PE Bonds were issued at conservative loan-to-value (LTV) ratios.
Half-yearly cash flows are paid out in pre-determined order, with bondholders prioritised ahead of equity investors. Thus, as sole equity investor, Azalea would bear any first loss arising from the portfolio.
Additional safeguards include regular reserving of bond principal, credit facility to fund interest payout in the event of cash flow shortfalls, and maximum LTV ratio that triggers mitigating actions if breached.
Validation by internationally recognised agencies
The robust structural design and strong cash flows from Astrea portfolios have been consistently validated by Fitch and S&P, with investment-grade ratings for the Astrea PE Bonds.
Post-issuance, the bonds have received multiple rating upgrades. This is testimony to the strength and expectation of the Astrea portfolios to perform well throughout the term of the bonds.
Performance of Astrea PE Bonds
To-date, Azalea has successfully launched five Astrea PE Bonds. These have consistently fulfilled all the bond obligations.
The Astrea III and earlier bonds are fully redeemed. The Astrea IV Class A Bonds are fully reserved, while the Astrea V Class A Bonds are almost fully reserved ahead of schedule.
This is testament to the quality and robust structure of the portfolios.
In summary, Azalea focuses on making PE accessible, especially for retail investors, and takes a long view of its stakeholder interests. We will continue to design investment products with the interests of bondholders and other investors clearly in mind.
Margaret Lui, chief executive officer, Azalea Investment Management
