There is a new round of issuance for the popular Astrea PE bonds in the market. This time, the coupon rate for the latest Astrea 8 PE bond is at either 4.35% (SGD) or 6.35% (USD) per annum.
At this yield, I think it is a great investment for investors with low-risk appetite and individuals prioritising wealth preservation. Before going into my reasons, let’s first examine what exactly the Astrea 8 PE bond is about.
What is the Astrea 8 PE bond?
The Astrea 8 PE bond is issued by Azalea 8 Pte Ltd, a wholly-owned subsidiary of Azalea Asset Management Pte Ltd, which itself is indirectly wholly owned by Temasek Holdings Limited.
Like any bond investment in the market, the Astrea 8 PE bond is not capital-guaranteed and there is a possibility (although small) that you could lose part or 100% of your investment.
At its core, the Astrea 8 PE bond is backed by cash flows from 38 private equity funds with a total portfolio of 1028 companies in various sectors & industries across three geographical regions.
The Astrea 8 PE bond IPO also has two different offerings, Class A-1 bonds in SGD and Class A-2 bonds in USD.
These are the main differences between the two offerings:
- Public offering size – S$260 million for SGD bonds, US$50 million for USD bonds
- Coupon rate – 4.35% for SGD bonds, 6.35% for USD bonds
- Scheduled call date – July 2029 for SGD bonds (5 years), July 2023 for USD Bonds (6 years), else 1% p.a. interest step-up for both till either bond maturity at 15 years or when redeemed
- Credit rating – A+ for SGD bonds, A for USD bonds
If you are wondering how the proceeds from the bond IPO would be used, it would mainly be used to pay off any shareholder loans of the underlying private equity portfolio.
With a clearer idea of the Astrea 8 PE bond, let’s look at the risk that investors are exposed to next.
Risk and safeguards of the Astrea 8 PE bond
As mentioned earlier, there is no capital guarantee for the Astrea 8 PE bond and like every market instrument, there are risks that investors should be mindful of before subscribing to the bond IPO. Nevertheless, there are also certain measures that Astrea 8 has in place to mitigate some of these risks.
Private equity fund risk
When it comes to private equity funds, there are usually limited disclosures to the public concerning the performance of the underlying investee companies. In addition, leverage is often used in private equity funds.
Hence, investors in private equity funds have to trust the track record and expertise of the respective fund managers.
For Azalea Asset Management Pte Ltd, since the first tranche of retail Astrea PE bonds in 2016, they have fully redeemed both Astrea 3 (the 1st retail bond offering) and Astrea 4 PE bonds on their scheduled call dates. Astrea 5 Class A bonds issued in 2019, were also recently fully redeemed on their scheduled call date.
We can also see that the reserve amounts for Class A bond redemptions of Astrea 6 and 7 are also accumulating nicely ahead of their scheduled call dates of March 2026 and May 2027 respectively.
This shows that Astrea’s brand of PE funds has had a good track record as the bonds were not affected much by difficult market conditions such as during the COVID-19 pandemic.
Additionally, if we look into the fund profile of the portfolio, 94% of the portfolio’s net asset value was in funds with at least 5 years of history. This should provide more consistent cash flows for the Astrea 8 PE fund.
Coupon payment & capital risk
When investing in bonds, investors are effectively lending their money to companies in exchange for interest payments and the redemption of their full capital upon maturity. Thus, it is important to assess if a company can sustain both the coupon payments and redeem their bonds upon maturity or when required.
For these two aspects, the Astrea 8 PE bond does have some safeguards and measures in place.
As seen, the Astrea 8 PE bondholders are prioritised first after accounting for the fund’s key expenses. This is for both coupon payments and the building up of cash reserves for bond redemptions at their scheduled call dates.
In the event of any cash flow shortfall, Astrea 8 also has in place a credit (debt) facility with OCBC to minimise disruptions to coupon payments or the building up of cash reserves.
However, if this credit facility is to be tapped into, I think it would significantly erode shareholders’ confidence and likely affect future bond offerings. Thus this method of financing would be a last resort for Astrea 8.
Besides assessing the company’s financial ability and measures, bond investors also need to be aware that the market value of their bonds can go up or down depending on the market. Some of the factors that influence bond prices include interest rates, geopolitical tensions/conflicts or unfavourable company news, just to name a few.
Nevertheless, these fluctuations in market prices would not affect investors at all if they held the bond till maturity as their initial invested capital would be returned to them, provided the company have the funds to fully redeem the bonds.
In the worst-case scenario, investors can also opt to sell the Astrea 8 PE bonds in the open market. However, it will likely be illiquid so the bond will take a while to be sold.
Foreign currency risk
For investors looking to invest in the Astrea 8 PE Class A-2 USD bonds, be aware of the foreign currency risk you are exposed to on two fronts, your initial invested capital and future coupon payments.
Looking at the price chart, USD has declined slightly against SGD over the past 5 years.
Will the USD continue to decline against SGD for the next 6 years? Honestly, I do not have the slightest idea at all.
This is also why there is a risk premium of 2% per annum between the SGD bonds and USD bonds to account for this uncertainty. Whether this difference is enough is really up to each investor to assess for themselves.
Also, for better or worse, Astrea has fixed the USD:SGD exchange rate at US$1:S$1.35 for the initial application of the Class A-2 bonds.
This means that for every US$1000 in bond application, you would be paying S$1350. Do note that this is only applicable for the bond IPO and not for future coupon payments or redemption.
Why I feel the Astrea 8 PE bond is great for low-risk appetite investors
Despite the risks of the Astrea 8 PE bond, I feel it remains a good fit for low-risk investors. I will only be touching on the Class A-1 SGD bond since that is what I think most investors would go for.
Looking at the options available to a low-risk investor, most would top out at around 4% interest per annum (CPF SA top-up). If money market funds were to be included, then this would rise to 4.2% (Chocolate Finance) instead.
While the Astrea 8 PE bond’s 4.35% per annum does not offer a huge premium, it allows the investor to lock in this rate for the next 5 years. This is especially crucial if we consider the trend of global interest rates.
With interest rate cuts a matter of ‘when’, the ‘risk-free’ rate will likely decline over the next few months. This means that the yield for new T-Bills and fixed deposits will be lowered. Returns from money market funds would also likely decrease as a result.
Thus, the next step up for low-risk investors looking to grow their money would be investing in bonds.
While investors can invest in individual corporate bonds or bond ETFs, the former requires the investor to research a company’s financial ability and prospects to sustain the bond and the latter requires the investor to buy into the ETF at the ‘right’ prices.
The Astrea 8 PE bond is a better option to me as its risk is already diversified with its underlying holdings and it also does not require investors to time their investments. Furthermore, based on the track record of Astrea, investors are also likely to get back their initial capital investment.
Thus, from a risk-to-reward and other market option perspective, I think a 4.35% interest p.a. for 5 years is a great investment to make for an investor with a low-risk appetite.
Application process & timeline
If you are interested in applying for the Astrea 8 PE bond, this would be the key dates to take note of:
- Application period: Opens on 11 July 2024 at 0900hrs, closes on 17 July 2024 at 12 noon
- Balloting date: 18 July 2024, return of funds for partial or unsuccessful applications
- Issue date: 19 July 2024
- Trading date: 22 July 2024 0900hrs
In terms of how to apply for the bonds, it is similar to how you purchase your T-Bills or SSBs. Simply go to the ‘apply for electronic shares or IPO‘ section on your respective internet banking platforms.
For UOB:
For DBS:
For OCBC:
Besides the internet banking platforms, applications can also be made via ATMs. Do note that you need a personal CDP account for the application to be successful.
The minimum amount to apply for would be $2000 in the respective bond currency and multiples of $1000 next. All applications would also solely be in SGD only.
If you are wondering what’s the allocation plan, Astrea plans to allocate in full for applications of $50,000 or below.
However, this could change if there is a huge oversubscription of the bonds. Based on the last tranche of Astrea PE 7 bonds in 2022, it was 3.1 times oversubscribed, though $50,000 or below applications were allocated fully.
With this round of Astrea PE bonds having a higher return amid a lowering interest rate environment, it will likely be another round of oversubscription. Whether to apply for more than $50,000 would depend on your own desired portfolio allocation. As always, don’t put all your eggs in one basket.