Wednesday, June 06, 2018

Astrea IV private equity Class A-1 bond

Astrea IV is a wholly owned subsidiary of Azalea Asset Management Pte. Ltd, which is indirectly wholly owned by Temasek Holdings. They are issuing bonds from their private equity funds, so this marks the first time we have a retail bond linked to companies that are not publicly listed and thus not accessible to the general non-accredited retail investors like you and me. Wholly shit.


BOND DETAILS

Name: Class A-1 Bonds 10NC5

Interest: 4.35% pa, semi annual payment. If not redeemed after 5 yrs on Jun 2023, will step up to 5.35% pa

Maturity: 10 yrs, on 14th Jun 2028 with scheduled call date on 14th Jun 2023. "Scheduled" is not "optional". If there is sufficient cash set aside for the class A bond to be redeemed, it must be redeemed. It's not an option. 

Application for IPO: Min $2k, with integral multiples of $1k thereafter

Period of application for IPO: 6th Jun 2018 9am to 12 Jun 2018 12 pm

Rating: Expected to be rated Asf by Fitch and A(sf) by S&P

Extra features: There is a bonus redemption premium of an amount not exceeding 0.5% of the principal amount. This means that if the par value if $1.000, the bond might be redeemed at less than or equal to $1.005, if conditions are met. The condition is that the sponsor receives 50% of its total equity (US $313 million) on or before 14th Jun 2023.

You can read more details from the full prospectus here. Product highlight can be found here.


Kyith has a more in depth and detailed write up on this same bond, so if you're into the nitty gritty details, you can check it out here. Kenichi kindly shared this video by Azalea regarding the bonds. Have a look below:



PERSONAL TAKE

1) Firstly, this is not Hyflux. This is a rated A bond by the rating agency. While I don't give a shit what they say about the bond, ultimately a rated A bond is still better than an unrated bond because the financials support it.

2) Putting money into a bond is lending money to others, who are likely going to take the borrowed funds and invest at a higher returns while giving you a lower interest. If you're not comfortable lending them at 4.35% while they earn an astronomical returns of 15 to 30% and pocketing all the difference, then don't lend. The risk profile of investing in private equity fund directly and lending money to private equity fund in the form of bonds are totally different. While it's true that private equity investors have higher upside, they have a greater downside as well.

3) After IPO, the bonds is going to be transacted in the open market at SGX on 18th Jun 9am. If you're not going to hold until they redeem back, you can sell it off at the market price. The market price is just what the name suggests - it can be higher or lower than the capital you put in, and you still have to include commissions. If you hold until maturity at the 5 yr or 10 yr mark, then you'll get back all your principal, and perhaps plus a little more because of the bonus redemption premium.

4) The interest rate is going up now, so in the event of a huge rise in interest over the next 5 yrs or so, the market price of the bond might go lower. If you can't hold for the entire duration of the bond until they redeem it, you might have to suffer a capital loss. But if you hold till redemption, it'll be redeemed at the principal value, minimally. In other words, it's capital guaranteed upon maturity.

5) Since the interest rate is going up, there might be more enticing bond than this in the future. I wouldn't put my whole warchest into here. A suitable allocation here should be fine. I'll be applying for this. Initially I wanted to put in some new funds from my parent's retirement fund into here, but I think I'm having second thoughts.

16 comments :

me said...

Sorry noob qn,
How do I apply?
I have a CDP account.

Thank you.

la papillion said...

Hi,

You can apply through atm or internet banking, just like any ipo.

Anonymous said...

It's basically securitization (collateralized cashflow obligations) of a bunch of PE structures held by Azalea & packaged into tranches for retail, HNW and institutional investors.

The underlying PE structures are in turn securitized (direct equity, CFOs, CDOs, contingent convertible bonds etc) collections of various private companies bought from PE companies like Blackstone, KKR etc.

The strength of this Astrea 4 therefore depends on the financial strength & performance of the various private companies, their weightings in the PE structures, and what kind of covenants exist in the underlying PE structures. Azalea and the various PE companies (Blackstone, KKR etc) must also be OK i.e. don't fail.

There are quite a lot of counter-parties in these things, becoz they are multi-layered structured financing/investment vehicles ala "structured deposits" and all that. Azalea is basically passing a portion of the risks of their PE structure holdings to you for 4.35%.

For ratings agencies to analyse & rate properly, they need to be given access to all the underlying private companies' books, their past few years' performance, and respective weightings in the various PE structures, as well as any special covenants. Not sure to what extent this was done, but definitely easier than the mortgage CDOs where obviously they cannot determine credit worthiness of every single mortgage loan out of tens of thousands.

My take is that one should have capacity for moderate risk to invest in this --- this means no retirees. And not more than 5% or 10% of networth.

Coz we're likely to have next major recession within 5 years which will affect business performance of all those underlying private companies. As long no funny or onerous covenants between some counter parties, the wide number of private companies should be able to pull through even if 1 or 2 go kaput.

Goh said...

Although this bond is not guaranteed by Temasek Holdings, if the worst case scenario happens, I would be very surprised if Temasek refuse to bail out a 500 million USD bond and take the hit to its reputation. For comparison, Temasek's net portfolio value is 197B USD last year.

Especially after what Ms Ho Ching said about creating products to allow people to plan for their retirement.

I think this makes up for opacity about the underlying funds.

Suaku said...

Noob question... do we receive the semi-annual payment of 4.65% directly into our savings account? I intend to hold this till maturity.

Anonymous said...

Hi, Can use SRS account to apply?

Anonymous said...

Don't misled people. Nothing is guaranteed. It is just an Indirect subsidary of Temasek. Read the product sheet again. It says no guarantee you will get back all your $.

Anonymous said...

Are you paid to write this article? In Page 1 and 5 of the Product Information Sheet, it said this bond is not guaranteed by any parties!

Chan w o said...

waste time to apply unless hold to maturity.
It will be v v hot.u will get maybe 2k if apply 10k.
sgx total commission of ard $27/**is v expensive.
Might as well buy safe and reputable reits w 5% and more dividends on top of capital appreciation if can hold more than 3 yrs.

Anonymous said...

5 to 10 years later, who know where is Ho Ching. No black & white to prove except the "it is not guarantee by any parties" clause.
Why is DBS rope in to cover any shortfall in cashflow? They foresee it?
But if they make 15% to 30%, you are paid only 0.5% above par.
Remseiers told me this is like DBS High Notes.
Good deal? You have to decide.

Anonymous said...

I think this is too complex for retailers to gauge the return versus the risks

la papillion said...

Hi,

1. The interest is paid to the bank account tied to your CDP. Same as for stock dividend, it'll be directed to the account that you receive it.

2. I think we cannot say that reits is higher yield than bond. Firstly, bond is capital guaranteed upon maturity, but no such guarantee is available for reits. There is a risk of loss of capital for reits. As for bonds, your capital is guaranteed as long as the sponsor is solvent. Different risk profiles.

3. I'm not paid to write this. If it is, I'll have it flagged as advertising.

4. We can't use SRS to apply for it, only cash.

5. I'm applying for some. If you think it is not worth it, then don't invest. Nobody said you die die must apply right? We all judge our own risk profile and decide what is good for ourselves. I'm going to apply for some, but decided that my parent's retirement fund is not going to participate in this, despite wanting to do it earlier. Changed my mind.

lim said...

My Perennial 4.65% 3 year bonds are maturing this year. This seems like a decent substitute. But I will also put some into any replacement bond that Perennial is going to issue as long as the coupon rate is higher.

I recalled that you didn't like the Perennial bond, from your post you are happier with this mainly because it is a rated bond? You write that it is capital guaranteed, but guaranteed by whom?

Astrea and Temasek don't seem to be guaranteeing the bond.

Anonymous said...

If 2020, Singapore does a "Malaysia" and change of govt, temasek may not be there anymore, so there is still a risk although some of u asys temasek linked bond is safe... somemore temasek does not provide guarantee for the bond, who knows what happens in the future.. Look at Malaysia, change of govt, everything changes, HSR also aborted ..

la papillion said...

Hi lim,

I meant that capital is effectively guaranteed upon maturity. If it is redeemed back, you will get back your capital, that's for sure. It's the interest that is not guaranteed, and the usual fact that the sponsor's solvency is not guaranteed.

Hi anonymous,

I think temasek will still be there whether there is a change in govt or not. Because it is an investment arm for Singapore.

cherryjoy said...

Hello there, Astrea IV's Class A-1 bonds closed at 103.7 on their first trading day, translating to a yield of 3.53 percent. What are your views on FOREX trading signals?