Astrea V is the second PE bond opened to retail investors. Launched by Azalea Asset Management, Temasek’s wholly-owned subsidiary with a Private Equity (PE) focus, this issue comes one year after the launch of Astrea IV, the first retail PE bond.

Structure of the Note

Astrea V offers three classes of bonds – Class A-1 is the retail tranche (smaller quantum of S$1,000), while Class A-2 and Class B are for Accredited Investors (par value of US$100,000).  

Total bond issuance of US$600m has a LTV ratio of 45.3% and is secured by cash flows from investments in 38 PE Funds with 862 investee companies. S$180m of the Class A-1 tranche will be available to retail investors for subscription through ATMs (minimum S$2,000).

Astrea V’s direct comparable is Astrea IV, the first retail bond. Figure 1 summarises existing bonds and their yield. Clause 8 requires cash to be reserved in the Reserve Accounts for redemption of Class A-1 bonds on their Scheduled Called Date. As Class A-1 bonds are very likely to be called in 2024, we have included bonds that have similar call or maturity dates.

Historical Astrea Issuances

Astrea III PE bond for Acceredited Investors was issued in June 2016. As of their fifth distribution date, 7 January 2019, the cash received by the Sponsor exceeded the Bonus Redemption Threshold (Performance Threshold equivalent for Astrea V). As such, bondholders are entitled the Bonus Redemption Premium should the bonds be called (July 2019).

Astrea IV, the first retail PE bond made its first distrubution payment in January 2019. During the distrubution peroid, liquidity facilities were not drawn on and scheduled payments for the period to the Reserved Accounts were made in full.

Quality of Underlying Portfolio

Cash flows are backed by a portfolio consisting of 38 PE funds with 862 investee companies. The transaction portfolio has a Net Asset Value (NAV) of US$1,324.4m and total exposure of US$1,539.4m, enlarged by Undrawn Capital Commitments of US$215.0m. Undrawn Capital Commitments refers to the unfunded capital committed to fund the operational and/or expansion needs of the investee companies. PE cash flows follow a J-Curve pattern in which they experience negative cash flows in the early years due to capital being drawn down for investmnets, and positive cash flow in later years (usually 5 yers) when divestments are made (figure 2). Due to the nature of cash flows, the portfolio has been constructed with funds with vintages ranging 3 to 8 years. The portfolio has a weighted average vintage of c.5.4 years and is diversified by fund strategy, geography and industry (figure 3 and 5).

The portfolio contains 81% buyout funds and 19% growth funds. Funds that fall under the buyout category are typically established companies with a an operating track record and while growth equity funds are companies that are still in their rapid expansion phase. Apart form better performance by buyout and growth strategy funds (figure 4), this asset allocation provides the cash flow required to match the periodic interest and principal repayment and the due to the higher composition of mature and stable companies that are likely to be in the positive cash flow generating stage.

Cash flow, NAV, Capital Drawdowns, and Distributions

NAV of the portfolio will fluctuate over the life of the bond. NAV is increased by the drawn down of Committed Capital by invested companies (additional capital injected) and reduced by distributions (return in capital) and disposal of invested companies.

Cash inflows are generated mainly through the liquidation of or exit from investments by the PE Funds. After fulfilling capital calls, remaining cash flow will flow through the Priority of Payments (Clause 1 – 13). Liquidity and Capital Call Facilities are in place to meet any shortfall in cash flow (outlined below).

In the event of any disposal of investee companies, Clause 7 ensures that proceeds from such sale flow back through the Priority of Payments.

Structural Safeguards

Reserved Accounts for Class A-1 and A-2 bonds (Clause 8)

After operational expenses and interest payments have been made in each distribution period (Clause 1 – 6), excess cash balances will be channeled into the Reserves Accounts for redemption of all Class A-1 and Class A- 2 Bonds on their Scheduled Call dates. The progressive build-up of capital in the Reserves Accounts provides visibility to the cash flows for bond principal repayment in 2024.

Maximum Loan-to-Value (LTV) Ratio of 50% (Clause 10)

The maximum LTV of 50% ensures that the debt is over collateralised. Should LTV breach the threshold, 100% of the remaining cash flow after Clause 1-9 are satisfied will flow to the Reserved Accounts until the Account Cap is met. Remaining cash flows will be used to redeem the outstanding Class B bonds (lowering the debt liability).

Credit Facility

Credit Facility (CF) not exceeding US$300m is available to fund operational needs and interest payment on bonds (Clause 1 – 6), or any shortfall in relation to Capital Calls. The CF comprises 2 parts, A and B, the sum of which should not exceed US$300m.

Part A is structured to step down as the bonds mature due to the decreasing cash flow needs (when Reserved Accounts are fully reserved or Class A bonds are redeemed). The step-down schedule for part A is as follows:

Year 1 – 3: US$130m

Year 3 – 6: US$100m

Year 6 – 10: US$40m

Part B will be US$150m, 50% of the maximum loan amount of US$300m.

Sponsor Sharing

If and after the Performance Threshold is met, instead of the Sponsor retaining all of the cash flow remaining after payment of Clause 1 – 12, 50% of such cash flow is allocated to the Reserves Accounts (until the Reserves Accounts Cap is met) to enable a faster build-up of reserves for redeeming the Class A-1 Bonds on their Scheduled Call Date.

Performance Threshold and Bonus Payment on Scheduled Call Date

Once the Sponsor receives 50% of the total equity injected, c.US$406.6m (the Performance Threshold), Class A-1 and A-2 bonds are eligible to a bonus payment of 0.5% of principal when bonds are redeemed on the Scheduled Call Date.

Source: Phillip Capital Research - 14 Jun 2019