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It wasn’t too long ago that the industry saw its first retail private equity bonds opened up to retail investors. One year after Astrea IV was issued, Singaporeans are once again anticipating the launch of these bonds.
Singaporeans love income investing. From the recent surge in REIT prices, to chasing high other high dividend yield stocks local banks and Singapore Savings Bonds, passive income as an alternative source of income is an attractive proposition. When you look at the ongoing trade war, uncertain economic climate and political turmoil in many parts of the world, you find yourself looking for shelter – and bonds are the natural place to be in.
SSBs typically offer between 2 to 3% yield annually, and there are other retail bonds issued in recent months like the SIA 3.03% corporate bond and Temasek T2023 bonds yielding 2.70%. There is obviously a greater push towards opening up the local bond market to retail investors like you and me. Previously, only accredited and institutional investors could purchase bonds, with high minimums.
Traditional bonds first
Before diving further into the star of this post, it is important to understand traditional bonds first – and how the Astrea V bonds can be priced so attractively.
Typical corporate or government debt (or bonds) are issued when the institution wants to raise debt (or money) and borrows from investors. The bonds are priced accordingly based on a number of factors, from their credit quality, risk of default, liquidity ratios and many others. Basically, the higher of risk of non-repayment of the debt, the more expensive the debt is. Just like how banks charge you for lending money to you, investors who lend out debt receive interest/coupons (determined by the interest rate) – which has to be repaid regularly on fixed schedules – and at maturity date, their capital back. There are further nuances between bonds like zero-coupon bonds, callable bonds etc but those can be a separate discussion.
The new Astrea V bonds
Here’s a quick summary of the new Astrea V facts & figures.
Issuer: Astrea V Pte Ltd
Issue Date: 20 June 2019
Maturity Date: 20 June 2029
Call Date: 20 June 2024 (for Class A-1)
Issue Size: S$315m
Interest Rate: 3.85% p.a.
PE bonds like the Astrea IV and Astrea V bonds are slightly different in how they work compared to other retail bonds. While all bonds are not capital guaranteed, and can fluctuate in prices when traded on the exchange, PE bonds have a more complicated underlying structure .
How the Astrea V bonds work is that they are backed by a portfolio of PE funds, and each fund owns multiple companies in their portfolio. In aggregate, there are 862 investee companies for the Astrea V portfolio you are investing into. The total net asset value of the funds are US$1.3b, and there is US$200mn of undrawn capital commitments used to fund operational and expansion needs of investee companies.
The underlying companies consist of a mix between 81% buyout funds – companies with a track record of operations and 19% growth funds – companies in the growth phase. Now this mix is interesting because the underlying cash flows from buyout funds can help sustain initial interest repayments while the growth funds ‘grow’ the NAV of the fund, in the hopes of producing higher returns to the fund manager several years down the road.
J-curve effect of PE
As such, Astrea illustrated the PE j-curve of which initial years will consist of capital contributions to companies to help them grow, and cash flows back to the fund will only come in later stages of investment. The cumulative net cash flow looks like a J-curve, sharply falling in initial years and then sharply rising in later years.
De-risking strategies and safeguards
PE is an opaque world – as private companies are not mandated to report their financials. Many of these companies might not have solid profitability.
To protect retail investors, the class A-1 bonds have structural safeguards in place to achieve timely interest repayments and not defaulting on its payments.
There is a reserve account created, where after interest and operational expenses are paid in each distribution period, excess cash will be channelled here to redeem class A-1 and A-2 bonds on their scheduled call dates in 2024.
There is a maximum loan-to-value (LTV) of 50%, meaning the ratio of amount borrowed to the fund NAV cannot exceed this. Should it be exceeded, increasing the risk of default, all cash flows after high priority expense payments like interest, taxes and manager fees flows back into the reserve account.
There is also a US$300m credit facility (with a step down function) to fund operational needs and interest payments on bonds or any shortfall in capital calls. This step down function reduces the credit available over the years as the level of risk drops (after redemption of class A bonds and build up of reserves).
Would I be buying?
Yes – I would.
While the yield is not the most exciting out there, especially for a bond investment with a private equity underlying, there is some level of diversification within – both geographically and at the industry level. I also like the structural safeguards in place to protect Class A-1 bondholders, i.e. retail investors and the sponsor is an indirect subsidiary of Temasek Holdings.
If I take last year’s issue as a guide, which was 7 times oversubscribed and currently trades at $1.06, this year’s issue will also be equally competitive and demanded by many retail investors. You will most likely not get the full allocation you asked for.