Astrea 9 PE-backed bonds offer attractive yields for retail investors
Astrea 9 bonds, the latest offering by Azalea Investment Management, will open for retail subscription on Thursday (Jul 31). The public may subscribe for S$380 million worth of the highest-rated Singapore dollar Class A-1 bonds, with a fixed coupon of 3.4 per cent a year.
Another US$50 million worth of Class A-2 US dollar bonds are also open for subscription, with a fixed coupon of 5.7 per cent a year.
Astrea 9's retail portion is the largest to date of the five previous Astrea issuances. In response to growing public demand, fund manager Azalea Investment Management raised the amount available for public subscription by 37 per cent compared to Astrea 8.
'We're pleased to return with a much larger retail tranche in Astrea 9 to support increased investor demand for suitable and resilient investment products,' said Chue En Yaw, chief executive officer and chief investment officer of Azalea.
'We remain committed to playing a meaningful role in shaping the financial futures of investors in Singapore and to empowering them with an investment option in an asset class traditionally reserved for institutions and high-net-worth individuals.'
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The Azalea Group is a subsidiary of Seviora Holdings, which is in turn owned by Temasek. Azalea's mission is to democratise access to the PE asset class among retail investors.
The Astrea bond issuance programme is designed with safeguards to prioritise the payment of coupon and principal for retail tranches, including a reserve account to set aside cash to redeem the bonds, and a liquidity facility to fund expenses.
The Astrea platform has built a track record to date of full redemptions for three previous issuances and a history of ratings upgrades.
Astrea 9's public offer follows the successful placement of S$235 million of Class A-1 bonds, US$150 million of Class A-2 bonds and US$100 million of Class B 'Payment in Kind' (PIK) bonds to institutional and accredited investors, which concluded on Wednesday.
Azalea said demand was strong across all classes from high-quality institutions such as endowments, insurance companies, corporates and asset managers. Allocations to the institutions accounted for close to 60 per cent of the investor base for the placement.
The combined placement order book of close to S$2 billion represents a 3.6 times subscription rate.
The latest issuance is backed by cash flows from a portfolio of 40 PE funds managed by 31 reputable managers, valued at around US$1.62 billion. It provides exposure to more than 1,000 companies diversified across vintages, sectors and geographies.
The portfolio has a weighted average age of five to six years. Justin Keh, Azalea's managing director for investment, noted that this is at the point of a PE fund's 'J-curve' 'when funds exit the investment period and enter the monetisation phase'.
'We expect the portfolio to be highly cash-generative during the life of the bonds, he added.
This marks the first time that Astrea featured a subordinated tranche of Class B PIK bonds, which will earn an interest rate of 7.35 per cent per annum, to be accrued every six months.
With PIK bonds, the accrued interest payable at the end of each distribution period is added to the original principal and forms part of the principal amount, compounded over time.
Class A-1 and A-2 bonds are expected to be rated investment grade by Fitch, at A+sf and Asf, respectively. Class B bonds are expected to be rated BBBsf.
Class A-1 and A-2 bonds have final maturity of 15 years, with a mandatory call at the end of five years on Aug 8, 2030, subject to the fulfilment of certain conditions.
Class B PIK bonds do not have a scheduled call date, but redemption can begin following the full redemption of Class A-1 and A-2 bonds.
The coupon rates, determined through a competitive book-building process among institutional investors, are regarded as competitive relative to similarly rated bonds.
Interest rates have been declining for lower-risk options such as six-month Treasury bills (T-bills), where the latest cut-off yield was 1.79 per cent , compared to 2 per cent in June. The Jul 1 issuance of the Singapore Savings Bond (SSB) carries an average annual interest rate of 2.49 per cent over 10 years.
Speaking on Class A-1 bonds, Elayne Ho, Standard Chartered Bank's executive director of capital markets, said: 'Institutional investors are going to look at where other Temasek-linked, single-A rated issuances are trading – currently at sub-3 per cent.'
Retail investors, she added, will also look at T-bills and fixed-deposit rates, and in this context the Class A-1 bonds' 3.4 per cent rate is 'pretty compelling'.
Class A-2 US dollar bonds, at 5.7 per cent, also '(stack) up as fair in comparison to senior A-rated bonds', Ho noted. 'And when we also look at subordinated Tier-2 capital (bonds), which are trading at low- to mid-5 per cent, they are lower than Class A-2 bonds.'
Colin Low, portfolio manager of the Bondsupermart's global fixed-income team, also believes Astrea 9 is attractive across the three classes of bonds.
'Considering the declining yield in the SGD bond space, Class A-1 notes will be a good option to lock in above-3 per cent yield at a strong credit rating, and pocket around 160 basis points in yield pickup over the five-year Singapore Government Securities, without taking on significant credit risk,' he said.
'Class A-2 notes will also be a good option for investors looking for a durable USD income of around 5 to 6 per cent yield, over an intermediate period,' he added.
'Overall, we think the appeal of Class B PIK notes comes from the high 7.35 per cent yield which provides interest similar to that of high-yield bonds. This gives investors the opportunity to augment the yield of their bond portfolio, without taking on significant credit risk, as compared to investing in a high-yield bond.'
Low also said Azalea's strong track record of redeeming past issuances provides some reassurance, 'despite no maturity 'floor' and a lengthy tenor'.
'We find the Class B PIK notes more suitable for investors with a greater risk appetite who are looking for higher yields, and/or those who are comfortable being 'locked in', without actual income for several years.'
The public offer will open at 9 am on Thursday, and close at 12 pm on Aug 6. Astrea 9 bonds are expected to be issued on Aug 8. Trading of Class A-1 and A-2 bonds is expected to start on Aug 11.
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