Bonds have traditionally been viewed as less volatile investments, paying out regular income over a fixed period of time. This characteristic also makes them a useful investment for retirees to continue receiving visible cash flows for their daily living requirements. Of course, investors who prefer less uncertainty in price fluctuation will also be drawn to bond investments.
In fact, earlier this month, Temasek Holdings CEO Ho Ching described the upcoming Astrea IV PE Bonds as a good “way to grow (our) retirement nest egg”. Unlike most bonds, the Astrea IV PE Bonds will be the first-of-its-kind allowing retail investors to access the private equity investment class that is usually exclusive to high net worth individuals, large financial institutions and funds.
Here are 10 things we should know about the Astrea IV PE Bonds before investing in it.
# 1 Is It A Temasek Bond?
This is one of the most common questions we see on the internet.
While not exactly correct, one of the main reasons everyone is thinking about it this way is due to the initial Business Times’ article which quotes Ho Ching saying “investors can invest in Temasek Holding’s first retail private equity bond to supplement their retirement income”.
In reality, Azalea Asset Management is the leading entity behind this issue. It is also a wholly-owned unit of Temasek.
# 2 What Exactly Is The Astrea IV PE Bonds?
As mentioned, the Astrea IV PE Bonds are bonds that will pay out fixed interest payments at fixed intervals to investors.
Unlike what’s available in the market right now, these bonds are backed by cash flows from a diversified portfolio of private equity funds. These funds are managed by world-renowned private equity managers including Apollo, Blackstone, KKR, PAG, Silver Lake, The Carlyle Group, TPG and Warburg Pincus.
A total of US$510 million ($682 million) is expected to be raised for the Astrea IV PE Bonds. This will be spread out between three tranches of bonds in this issue Class A-1, Class A-2 and Class B. Only the Class A-1 Bonds are being offered to retail investors.
$242 million will be allocated to the Class A-1 bonds. Of this, half will be privately placed out, with the other half offered publicly. This $121 million is what we are going to be subscribing for.
These bonds will also be listed on the Singapore Exchange (SGX), allowing for smaller investment sums as little as $1,000 and achieving greater liquidity.
Prior to the Astrea IV PE Bonds, there were three other private equity bonds issues – Astrea I, Astrea II and Astrea III. Astrea IV is the first time retail investors have the chance to participate.
# 3 Why Can’t We Invest In Private Equity Itself Rather Than In Private Equity Bonds?
These is usually significant barriers for retail investors like us to access private equity. This is mainly due to the fact that private equity investing typically requires a large investment quantum, long vesting periods, deep knowledge of the industry and are very illiquid compared to stocks and bonds.
As such, it is usually reserved for institutional investors and high net worth individuals. Now, these private equity bonds allow retail investors to sidestep these entry barriers.
The management team of Azalea also mentioned that the bonds is one way to offer retail investors access to the private equity market, and that in the future, it could be possible for equity to be offered to retail investors.
# 4 What Is The Interest Returns On These Bonds? And What Is The Maturity Date On Them?
This is another key question many investors will have. This table depicts the interest returns on the different classes of the bonds.
|Interest Rate (p.a.)||Interest Rate Step-Up (p.a.)||Scheduled Call Date||Maturity Date|
|Class A-1||4.35%||1.00%||14 June 2023 (5 Years)||14 June 2028 (10 Years)|
|Class A-2||5.50%||1.00%||14 June 2023 (5 Years)||14 June 2028 (10 Years)|
|Class B||6.75%||N/A||Cash Sweep||14 June 2028 (10 Years)|
As you can see, the interest returns are expected to be close to 4.35% on the Class A-1 bonds. There will also be a one-time 1.00% step-up in the interest rate if the bonds are not called on the Scheduled Call Date on 14 June 2023. Further, a bonus redemption premium of up to 0.5% in interest will be paid out to the Class A-1 bondholders at redemption should its performance threshold be met.
For us, only the first row would be important, as retail investors are only able to invest in Class A-1 bonds. Another point to note is that upon listing, Class A-1 shares and Class A-2 shares will be ranked parri passu (which basically means on an equal footing).
# 5 Why Is The Class A-2 Bonds Paying Out Higher Interest Rates If It’s Ranked Equally To Class A-1 Bonds?
This is a question on many people’s mind given its equal ranking and close to 1.15% difference in interest rate payments.
The discrepancy in interest rates can be explained by three main differences.
# i Class A-1 bonds are denominated in Singapore Dollars, while Class A-2 bonds are denominated in US Dollars
# ii Class A-1 bonds have a higher priority in repayments. This means that if there is only sufficient cash to redeem Class A-1 bonds at the scheduled call date in five years, it will be exercised, while there is a chance the Class A-2 bonds will not.
# iii There is also a bonus redemption premium of up to 0.5% in interest that may be paid out to the Class A-1 bondholders at redemption should its performance threshold be met.
# 6 How Did They Come Up With The 4.35% Interest Rate For Class A-1 Bonds? Is This A Fair Price?
Another question that may be on people’s minds is how the company came up with the interest rates they are willing to pay out and whether they are fair amounts?
This is actually one of the reason why half of the Class A-1 bonds were placed out prior to the offer to retail investors. This was to get a sense of just how much savvier investors, including institutional and high net worth investors were willing to receive for taking on such risks.
The number they arrived at was 4.35%.
# 7 Why Are There Different Bond Classes? And Why Can’t Retail Investors Invest In Class A-2 and Class B bonds?
The different bond classes represent different risks they face. Of course, the least risky tranche will pay the lowest interest rates and the most risky tranche will pay the highest. This means retail investors are only being offered the least risky tranche.
Secondly, Class A-1 bonds are being offered at a minimum investment of $2,000, and higher amounts in multiples of $1,000. Compared to the Class A-2 tranche (US$200,000) and Class B tranche (US$200,000), this is significantly lower barrier.
# 8 Is My Money Guaranteed By Azalea Asset Management (And By Extension Temasek Holdings?)
No. The Astrea IV PE Bonds are not guaranteed or backed by Azalea or Temasek or the government of Singapore in any way.
Just think about how a corporate bond functions – they are backed by the company that issues it. These bonds work the same way, and is guaranteed by cash flows from the underlying private equity assets.
# 9 So How Safe Is This Investment?
This is the obvious next question. There are several ways to determine how risky this investment is.
Firstly, these bonds are backed by cash flows from an investment portfolio in 36 private equity funds, invested in 596 investee companies, managed by some of the world’s leading private equity managers, worth US$1.1 billion.
No single company makes up more than 3% of the value of the portfolio. The biggest sector exposures it face are the information technology (23%), consumer discretionary (21%), industrials (12%), healthcare (11%) and financials (10%). The geographical exposure it faces constitute the US (63%), Europe (19%) and Asia (18%).
In terms of being able to repay interest rates on the bonds even during a future global financial crisis, this diverse portfolio should be able to stand up to scrutiny. In addition, there is also a liquidity facility that it can draw on to repay interest rates in periods when there are droughts in cash flows.
For example, during the 2008 Global Financial Crisis, there was a drought in cash flows for the Astrea I bonds for a period of close to 18 months. While the impact of the financial crisis was minimal, the bonds had to overcome a shortfall in cash flows in those 18 months. This is where the liquidity facility kicks in to maintain regular interest rate repayments to investors.
Lastly, these bonds are have also been given the investment grade ratings by well-known ratings agencies Fitch (Asf) and Standard & Poors’ (A(sf)).
# 10 How Can We Invest In The Astrea IV PE Bonds?
Most importantly, we need to know how we can invest in these bonds.
Firstly, the Astrea IV PE Bonds will be listed on the Singapore Exchange (SGX). This means we can simply buy or sell these bonds on the SGX, the same way we buy or sell stocks. However, these bonds won’t be listed until 18 June 2018 at 9 am.
From 6 June 2018 at 9 am to 12 June 2018 at 12 pm, we can subscribe for these bonds. We can think of it as the Initial Public Offering (IPO) phase where retail investors can subscribe for these bonds. We can do so via ATMs or internet banking websites of DBS Bank (including POSB), OCBC Bank and UOB Group.
Here is the time table of the offer:
|Opening date and time for applications for Class A-1 bonds||6 June 2018 at 9 am|
|Last date and time for application for Class A-1 bonds||12 June 2018 at 12 pm|
|Date of balloting of applications for Class A-1 bonds. Commence refunding of money to unsuccessful or partially successful applicants||13 June 2018|
|Expected issue date of Class A-1 bonds||14 June 2018|
|Listing date||18 June 2018 at 9 am|