Okay – there’s something interesting about the new Astrea 8 bonds.Â
Readers have also recently emailed me asking about this. It’s been a while since I talked about bonds.
Let me share some thoughts here.
I’ve previously bought both Astra IV and Astrea VI bonds (see green box below), mostly for my son’s portfolio.
I thought it was a great way to invest his savings into a safe, corporate bond (I’ll share my experience in a bit).
Now, Astrea has issued a couple of these bonds before. It’s not the same as the SIA MCB bonds by the way.
And so far, management has a good track record of paying back bond principal and coupons.Â
Last week, Astrea announced it wants to raise a fresh set of bonds — Astrea 8 bonds. it wants to raise close to a massive S$800 million of bonds.
Is this something risky?
What do I need to know as a bond investors?
And are Astrea 8 bonds worth buying today?Â
Let’s dive in!
First things first — what I know about Astrea 8 Bonds manager
I’ve personally invested in Astrea bonds, not just Temasek Holdings “owns” its manager, Azalea. But what I noticed is Astrea is one of the few bond issuers with a strong alignment of interests with bondholders.
Unlike some other bond issuers I used to know, you can tell management is trying their best to put out as much information as they can. This is assuring.Â
It’s not easy to explain how a bond works.
It’s also not easy to explain how a private equity fund works. So far, I found Astrea doing a good job sharing how this whole investment operations work.Â
For instance, showing how payments are flown in the entire Astrea structure below.
What are Astrea 8 Bonds?
Now, there are two classes of Astrea 8 bonds: Class A-1 and A-2 bonds. As I’ve said, both bonds are backed by cash flows from a portfolio of private equity funds.
What this means is Astrea management will reap the returns from these PE funds and pay down both bond principal and interests (paid every half a year in July and January) over time.
Investors will think a private equity fund is risky. I don’t disagree. Private equity is an operation that invests in smaller, riskier businesses.
As I looked closer, Astrea management picks on the quality of private equity managers to invest into these smaller businesses.Â
What’s more, Astrea’s private equity fund investments are diversified across the US, Europe and Asia. More crucially, these funds invest in about 1,000 companies across different industries.Â
I had a deeper look into their prospectus: Today, management has invested into a total 38 funds, including Bain Capital, Carlyle Partners, KKR, Silver Lake, TPG and so on.
This also includes its other “specialized”, growth equity funds…
Astrea’s management has invested in private equity funds for a long time. If you’re a finance junkie (like myself), you’ll know these top private equity funds have rode through many market cycles.Â
This way, I’d feel more comfortable accepting the potential default risks investing in Astrea bonds,.
So… which Astrea 8 Bonds would I pick?
My simple answer: I’ll go for Class A-2 bonds. Why?
First and what’s unique is, Class A-2 bonds have a higher yield at 6.35% USD yield, as compared to Class A-1 bonds, which will trade at 4.35% SGD yield. You see, the current 5-year Singapore government bond yield is 3.2%. Buying Class A-1 bonds means you get only an additional 1.15% more yield.Â
On the other hand, the US treasury yield now trades at 4.2% today. This means, buying into Class A-2 bonds instead, gives you a 2.15% premium above US treasury yield.
For an A-rated bond, this is a quite good “yield pick-up”, in my view.Â
Even though Class A-2 bonds get called six years later, (compared to Class A-1 bonds, which get called in five years), I’m okay with the longer call date. Even if Class A-2 bonds don’t get called back, management has to pay 1% more yield on the bonds’ coupons after that. Not too bad.
From my experience, I don’t think Astrea will increase the bond coupons after the call date, it doesn’t make sense for management to pay a higher interest rate to its bondholders.
I’ll note one difference between Class A-1 and Class A-2 bonds: Class A-1’s Reserve Account gets funded first, before Class A-2 bonds’ Reserve Account.Â
Now, a Reserve Account just means any profits made from the private equity funds will first be placed into these Reserve Accounts, in order to pay back the Class A-1 and Class A-2 bond principals and interests later on.Â
Put it this way, it’s how management decides to hold the profits first, before paying back principals and coupons on time.
Fitch, one of the top credit rating agencies, has also said the priority of putting money into each bond’s reserve account has impacted each bonds credit rating.
But I don’t think it won’t financially impact bondholders. Anyway, both Class A-1 and Class A-2 bonds are ranked “similarly”, or pari passu in a bond structure.Â
If one of these bonds default, both will default too.Â
Where are Astrea 8 Bonds hidden risks?
Now there are two big risks when buying Astrea bonds.Â
First, is what I call price risk. If interest rates keep going up, Astrea bond prices will drop. Most retail investors (even myself) can’t stare at the sight of retail bonds losing money. It’s a worse feeling than owning stocks. This is because we expect bond prices to be stable.Â
When I previously bought Astrea bonds for my son, the temporary price drop was an eyesore for me, knowing the investments are stuck in these bonds, and there could be other great stock ideas out there. If you can’t manage such temporary price risks, I suggest skipping Astrea bonds.Â
Second, currency risk. Class A-1 bonds are denominated in SGD – no currency risk, good for Singapore investors. What I’m talking about is Class A-2 bonds, which coupons are paid in USD.Â
Since there’s no capital gains in a bond, if USD weakens against the SGD it will lower the 6.35% coupons we earn.
But here’s the thing, Class A-2 bond yields are pretty good, which means USD must weaken against the SGD by ~30% to make Class A-2 bonds a bad investment. If we expect USD to drop by that much, we’re better off buying Class A-1 SGD bonds instead. I don’t think USD will depreciate so much against the Singapore dollar, especially since the USD is still considered the world’s reserve currency.
Would I buy Astrea 8 Bonds today?
I’ll be subscribing for Astrea 8 bonds. I’ll pick Class A-2 bonds over Class A-1 bonds. Why? Simply because the yield is more attractive, and I find its interest coupons sufficiently compensate for currency risk (I don’t think USD will depreciate so much), and the extra year before Class A-2 bonds get called.
What’s more, Astrea bonds are currently rated a high-quality single A rating.
Having said that, these Astrea bonds should be part of a well-diversified stock portfolio. Also, note that Astrea 8 bonds aren’t like a Singapore REIT, coupons don’t increase over time.
Final thoughts – who would buy these bonds?
As a dividend investor, I pull the three levers of profits for long-term returns: capital gains, dividend growth and yield. Buying a bond only provides an income yield. And buying Astrea bonds probably makes sense if you’re targeting a specific yield for your retirement portfolio – perhaps 4% or 6% yield.
In my view, I treat Astrea bonds like a “cash management tool”, which gives you a higher rate of return than a treasury bill, while knowing these bonds are still a rather safe instrument to invest in.Â
Will you be buying Astrea 8 Bonds? If so, which ones?
Let me know in the comments below!
Sometimes, investing can be simple.Â
Willie Keng, CFA
Founder, Dividend Titan
why do you say there are no prospects fpr capital gain? If interest rates fall, the price will go up?
Hey Dawei!
For Astrea bonds, I usually hold it till it matures, or it gets called back by the company. Even if bond price goes up, I don’t think there’s a huge gain as compared to stocks. Both Astrea bonds mature in 15 years (2039), but I suspect the positive impact of lower interest rates isn’t as big because of the call dates in 2029 and 2030. Typically the impact of lower interest rates is much bigger for very long maturity bonds, not for Astrea in my view.
Cheers,
Willie
“Even if Class A-2 bonds don’t get called back, management has to pay 1% more yield on the bonds’ coupons after that. Not too bad”
Not too bad if interest rates don’t move much or move lower however if USD interest rates in July 2030 are say 10-15% ( remember the 80’s ? ) then presumably they don’t call and enjoy my cheap money for another 10 years.
Do they have one chance to call .. ie 2030 ? or can they call any time between 2030 and 2040 ?
Does that make sense ?
Robert
Hi Robert,
Astrea can choose to call back its bonds every year, otherwise it will have to increase 1% each year as long as the bond remains outstanding after 2030. Yup, we do need to have some view on where interest rates are generally going in the future before buying this bonds, though I don’t think it will be a major concern since my plan is to hold Astrea till it matures.
Cheers,
Willie
For Astrea 8, Azalea will only increase by a one-time 1% post mandatory call, not 1% per year unlike in previous issuances
Hi Willie, can I check how did you calculate the 30% depreciation of the USD as a buffer? Thanks for the informative article.
Hey AI T,
Thank you for your comments, I appreciate it. For Astrea bonds, my immediate concern was currency risk for the coupons only. Do check my reply to E T (see below) on currency risks explanation 🙂
Cheers,
Willie
Just wanted to correct an error on the currency risk – while it’s true that USD needs to appreciate by ~30% against the SGD for Class A-1 bonds to be more worth it, this comparison only applies to the interest component. I believe the impact of a potential USD depreciation also needs to be factored into the capital wherein an investor might get back less than par value post conversion to SGD…
I did some calculations – USDSGD needs to depreciate by ~7.6% (from 1.35) to 1.2475 before Class A-1 becomes more worth it.
Hey E T!
Yup, if you account for principal, USD has to be depreciate much lesser to have a higher margin of safety. However, if that’s the view, then I wouldn’t consider Class A-2 in the first place at all.
Now in this case, I only accounted for the interest component and not the capital. This is because I expect USD/SGD to be stable over the long-term, or at least during the duration of the bond. My immediate concern is income from the coupons will be subjected to short-term currency volatility. It’s more important for me to consider collecting dividends + coupons for my portfolios.
This is my personal view. Hope this is clear 🙂
Cheers,
Willie
“Class A-2 bond yields are pretty good, which means USD must weaken against the SGD by ~30% to make Class A-2 bonds a bad investment. If we expect USD to drop by that much, we’re better off buying Class A-1 SGD bonds instead”
How do you workout the ~30% drop of US to SGD for A-2 bonds returns worse than A-1 bonds?
I think he uses the delta of 2% in both bonds’ yield multiplied by the bond tenor of 15 years. The thing is if we hold the view that the bonds will be called in 5/6 years time, then the evaluation would be whether a 10-12% depreciation of USD against SGD will occur in this period.
Ignoring the currency impact on the coupon which is minimal, basically the 2% per annum pick up is a 2% buffer against currency depreciation every year the bond is not redeemed.
Hey David, Kevin,
Thank you for your comments, I appreciate it. For Astrea bonds, my immediate concern was currency risk for the coupons only. Do check my reply to E T on currency risks explanation 🙂
Cheers,
Willie
Obviously the -30% is wrong, if usd depreciates by so much the principle is going to be worth 70% now. You would be in a terrible position.