“Is Astrea VI bonds safe… or not?”
US$643 million. That’s how much Azalea Asset Management wants to borrow from bond investors.
I’d say this is one hot deal right now. Let me share my short, honest views on this.
Private-equity (PE) firms are often shown in the media as sinister, and look mysterious on the outside.
Few people understand how they work.
But everyone knows one thing — They make a lot of money.
How do they do it?
You see, like Singapore REITs, PE firms borrow other people’s money.
Then these PE firms use the money to invest in many, many privately-held companies.
Like REITs buying many investment properties.
Earnings from these privately-held companies are then used to pay down their borrowings.
Finally, PE firms are left owning the entire asset, which they can sell it off via an IPO.
It sounds tremendously complex, but it’s not
It’s exactly the same as how property investors do all the time. They buy a property, put down 20% in cash, get a bank loan to pay the other 80%.
And use the rental income to pay down both the principal and interest, until they own the property.
And when done right, this is the safest and most profitable form of leveraged investing.
That’s how big PE firms like Blackstone, Bain Capital, Warburg Pincus, TPG, KKR made their fortunes.
In fact, Blackstone’s returns were 22% annually since their founding in the 1980s.
Now, Temasek’s Azalea Asset Management is an astute investor in picking the best PE firms.
And they have been doing this successfully since their founding in 2015. Actually, Temasek, through its other direct subsidiaries have launched other Astrea products as early as 2006.
But what’s more important here is Azalea knew how to control their risks.
You see, Azalea doesn’t just invest in any “Tom, Dick or Harry” PE firms.
They invest in, in my opinion, some of the biggest, most profitable PE firms in the world.
The fact is, today, Azalea is borrowing money via Astrea VI bonds to invest in 35 funds managed by some of these PE firms. And these 35 funds invest in — bite-sized positions — a total of 802 companies across the US, Asia and Europe, across all kinds of sectors.
So… is Astrea bonds risky?
Here’s the thing.
My first thought of the new Astrea VI bonds, like any of the other Astrea bonds, was it’s risky.
But the truth is, as mentioned, Astrea bonds are “backed” by a widely diversified 35 PE funds.
And while I may not know all the 802 companies, I trust Azalea’s reliability and acumen in making good investing decisions.
When you buy a REIT, you’re also trusting the property acumen these REIT managers make.
Since 2006, Astrea bonds have not had a single default.
In fact, the Astrea III Class A-1 Bonds launched in 2016 were fully paid back, way before its maturity date in 2026.
Now, what really surprised me, is Azalea is doing all it takes to provide the entire library of information to educate investors.
Azalea knows private-equity investing is hard to understand for most people like you and myself.
And I like the Temasek-backed company for making themselves as transparent as possible.
By the way, if you want to find out on the features of the new Astrea VI bond, when and how to buy them, I think Seedly has done a a great job distilling some of the core information here.
You know, after working so many years as a junk bond analyst, there’s no other company raising bonds that comes close to Azalea’s transparency.
Most companies simply couldn’t care much about educating investors.
Why is Astrea bonds’ yield so little?
The problem is, at first glance, the yield is low.
The new Astrea VI A-1 Bond only pays me 3%, yet I’m still investing in a highly-risky basket of private companies after all, right?
You see, I’m not buying into “junk” bonds here, but high-quality corporate bonds that are raised from a Temasek-linked company.
And while a 10 year Singapore Savings Bonds is paying me 1.15%/year today, I’m getting paid 3%/year from Astrea bonds till 2026 (call date), which to me is a pretty good deal.
And if Azalea doesn’t call the bonds back in 2026, I get paid 4%, instead of 3% till 2031.
A call date is simply giving Azalea the choice to buy back Astrea bonds. If they don’t buy back the bonds, there’s a penalty. In this case, if Azalea doesn’t call the bonds back in 2026, I get paid 4% instead of 3% till 2031.
Source: Azalea — Astrea Bonds Prospectus
Is is worth buying the new Astrea VI Bonds?
Let’s just say, I can sleep soundly at night with these bonds.
In fact, as pessimistic as a bonds analyst, I’m for once, truly positive about a Singapore corporate bond.
Temasek doesn’t guarantee Astrea bonds. But the way I see it is this.
I’m comfortable enough with Azalea that I’ll bet my money on Azalea’s shares instead… if they were ever listed.
And if you ask me, as a long term investor growing my wealth, this is one corporate bond I’m probably buying.
Willie Keng, CFA
Founder, Dividend Titan
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