Monday, 4 June 2018

My thoughts on astrea IV bond

*Disclaimer- Do note that the content in this blog are my views and analysis in this post and they could be inaccurate.



In case you have not read the prospectus, you can find it here.

According to the article, the retail bonds of class A1 could be offered at 4.625%. These retail bonds will be allowed to trade in the market.

From the prospectus, most of its Private equity investment comes from buyouts(86.1% of NAV).

Buyouts are usually leveraged (which means they take on huge debts) to buy out companies and run these companies as a private entity. Usually with the huge use of manageable debt and frequent board meetings since they are private entities, the company is able to bring in the returns for the private equity funds in the form of  IRR (Internal rate of return)

Investors are investing into these private equity companies' future cash flows. The cash flows would flow in tranches to Class A-1, then Class A-2 then Class B then to the Equity tranche. There would be 36 private equity funds involved in 596 Investee Companies with each company's Nav no larger than 3%.

Pros of the bond

1. Ownership
The equity tranche of the bond is held by the sponsor.  The highest risk tranche is held by the sponsor and not sold off which could be a show of faith in the assets of the private equity fund. Being the equity tranche, it would only receive the distributions last after all other classes have received what they ought to get as stated in the books. The equity tranche would also get their repayments last.

2. Major holding's performance
Performance of its 3 major fund has been encouraging. According to CalPERS, as of 30 September 2017 its fund performance are as follows.




All funds have been positive in returns and have a Net IRR of  >10% which i do think that its impressive. Furthermore, Silver Lake is in its initial stage as its vintage year is in 2013. This means that there could be further growth coming out from it.



Cons of the bond

1. Possible dead-weight private equity funds
A private equity fund has a rough timeline of around 10 years before exiting its investments and returning the cash to its investors. Which is why u see I II III IV V VI in its names. It is a representation of the 1st 2nd 3rd 4th 5th 6th 7th of the private equity funds.
One method of exit for Private equity funds will be to IPO these companies. However, in the portfolio, 25.9% of it actually have been around for 10 years and above. With 8.4% of the portfolio being 12 or more years. It seems like these funds could be a 'dead-weight' where an exit strategy could not be found and would be a worry.

2. Fees
As the portfolio consist of 36 private equity funds, effectively we are paying 36 times of management fee to these funds to manage these assets and the cash flow that we would get would actually be a residual of the profits subtracted by these fees. One might wonder what are the fees involved in a private equity fund, some clue can be located here.
On top of these fees charged by the private equity, there would be a management fee of  0.175% of Portfolio NAV per 6 months by Azalea. This fee along with other fees like liquidity facility payments are deducted from the cash flows by the private equity funds and the remainder would be given to the tranches. The exact structure can be found in page 120/306 of the prospectus.

3. Lack of Disclosure of its Investments
As the name private suggest, investors have little idea what are the funds investing in. This makes it difficult for investors to track the returns of such funds. This information asymmetry might not aid them well in making decisions should there be a sudden change in the traded price of its bonds.

4. Are companies mature?
In its prospectus its stated that the weighted average of fund age is 7 years. Mature funds exposure are more cash flow generative. However the initial stage of a PE fund could take 2-5+ years depending on which website u look for definitions. From Calpers it would be 2013 and later. In this portfolio, most of its fund's vintage years are in 2011,2012,2013,2014. With 2013 and 2014 accounting for 33.4% of NAV.
The weighted average of funds can be a double edged sword. Too early and we might not see any cash flows coming from the funds. Too late we could be seeing repayments faster which might affect future cash flows. The good thing for A-1 bond holders will be that there will be no redemption of the bond before the scheduled call date in 2023.(Page  52/306)



Conclusion
Personally I do think that if issued at par, the yield of 4.625% is actually pretty decent for the next 5 years. The track record of the top 3 funds are also pretty encouraging alongside sponsor holding the most risky tranche.
However, the thought of the many fees involved does not seem to entice me and although this might trade better than some retail bonds like Frasers 3.65% bond, investors are betting on the PE funds being successful and able to replicate the performance they have done while being unable to track the investments on their own, unlike Frasers Property Limited for example which is listed and has a balance sheet that investors can refer to. Investors are unable to assess the debt of these companies owned by the private equity funds
This lack of information could be seen as one of the few reasons why this astrea IV bond would be priced at a yield much higher than some listed company's bonds.

Personally I am not a bond investor hence it is highly unlikely i would subscribe to the retail offering.

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