As part of our ongoing efforts to provide you with more fixed income investment opportunities, we’re pleased to announce that we have a newcomer to the list of wholesale bonds available on the FSM Bond Express—the ASTLC 3.900% 08Jul2019 Corp (SGD) - Class A-1. Accredited investors can now invest in the ASTLC 3.900% 08Jul2019 Corp (SGD) - Class A-1 in S$5,000 denominations (by principal value), as opposed to the typical S$250,000 minimum investment quantity. This will provide you with more flexibility to diversify your portfolio, while investing in a unique investment product that offers attractive return with limited risks.
Previously, we wrote three reports to introduce the Astrea III transaction and update investors on the performance of the bonds. The links to these reports can be found near the bottom of this article. In conjunction with the launch of the A-1 notes on Bond Express, we highlight here the most important things that prospective investors should know about the bond.
The Astrea III notes are Specified Investment Products (SIP)
Recall that the Astrea III transaction is a type of structured finance instrument known as collateralized fund obligation (CFO). Due to its various structures, features and risks that are more difficult to understand compared to other investment products, the Astrea III notes including the A-1 notes are categorized as Specified Investment Products (SIP).
To protect investors, the Monetary Authority of Singapore has regulations that require all financial institutions to assess their retail investors for relevant knowledge or experience in trading SIPs. To invest in a listed SIP like the ASTLC 3.900% 08Jul2019 Corp (SGD) - Class A-1, retail investors will need to “pass” or fulfil the Customer Account Review (CAR) criteria. Accredited investors are exempted from CAR.
If you are a retail investor and you do not meet the CAR criteria, you can still proceed to transact in SIPs, but subject to safeguards put in place by iFAST Financial Pte Ltd. You may refer to FSMOne’s FAQ page for more information on the CAR assessment process.
The Class A-1 notes are the most senior tranche in Astrea III's capital structure
The SGD-denominated A-1 notes (alongside the A-2s) constitute the most senior debt obligations under the Astrea III deal. Fitch Ratings and S&P Global Ratings rate the A-1 notes as 'A+sf' and 'A+(sf)' respectively, which indicate strong investment-grade credit quality.
We note that certain expenses such as taxes, management fees, and trustee fees rank ahead of the Astrea III notes in the order of priority set out in the priority of payments. To support these expenses and interest payments to noteholders in the case of a liquidity shortfall, Astrea III Pte Ltd (the issuer) has entered into a liquidity facility agreement with Credit Suisse AG, London Branch.
The liquidity facility is also senior to the Astrea III notes. If the issuer borrows from the liquidity facility, it cannot redeem the Astrea III notes (including the A-1 notes) before repaying in full the outstanding interest and principal amount of the loans. Since its inception and up till the last distribution reference date of 21 Dec 17, Astrea III has not drawn on the liquidity facility.Three-year scheduled maturity; repayment fully reserved
The ASTLC 3.900% 08Jul2019 Corp (SGD) - Class A-1 has a scheduled maturity of three years, ending on 8 Jul 19. Unlike most other asset-backed securities, the A-1 notes do not have prepayment risk—the issuer Astrea III Pte Ltd cannot redeem the notes prior to the scheduled maturity.
Similar to the other Astrea III notes, the A-1 notes have a maximum tenor of ten years. But as mentioned in our most-recent update, the reserves accounts—whose purpose are to conserve cash for the repayment of the Class A notes (both A-1 and A-2)—have accumulated USD223.8m as at 21 Dec 17. This means that just halfway through the three-year scheduled maturity, the total reserve amount already exceeds the S$228m (~USD168m) A-1 notes principal amount.
Or put it another way, unless the banks which hold the reserves money abscond with the money or go bankrupt, it is a safe bet that the A-1 noteholders will get their principal back on 8 Jul 19. In a July report, Fitch highlighted that Astrea III held the reserves accounts with three banks rated 'AA-', 'A' and 'A-'. S&P reported in September that it has “weak-linked the rating on the class A-1 notes to the lowest rating on the bank deposit providers, currently 'A+'.”
In the remote event that Astrea III does not redeem the A-1 notes in July 2019, a 100bps coupon step-up will apply on interest payments after the scheduled maturity to compensate investors for the extended tenor. Holders of the Class A-1 notes will continue to receive interest payments until sufficient funds are accumulated to redeem the A-1 notes in full.
Potential 0.3% bonus payout
Astrea III’s strong performance in the 18 months since launch has allowed it to pay a handsome USD193.9m to the sponsor (Astrea Capital Pte Ltd) for its equity investment. If the payouts to the sponsor exceed USD326.6m (50% of the equity investments on 31 May 16) on or before 8 Jul 19, holders of the A-1 notes will receive a bonus payout of up to 0.30% of their principal. With three distribution periods remaining until the scheduled maturity, we think there is a decent chance for bondholders to receive this extra S$684k (in aggregate) bonus payout.
3.51% yield to maturity
We think the market is mispricing the Astrea III notes due to their relative lack of liquidity and valuation difficulties—lack of comparables in the bond marketplace and the higher complexity of CFOs. As of this writing, assuming a maturity date of 8 Jul 19, the ASTLC 3.900% 08Jul2019 Corp (SGD) - Class A-1 is trading at 100.5 for a yield to maturity of 3.51%.
The 3.51% YTM is highly attractive for a bond with just around 16 months left and that has fully reserved for its repayment just midway through its maturity. We would be hard-pressed to find better returns in the SGD bond universe with similar (limited) risks. And this investment opportunity is now available to you on the FSM Bond Express.
Related Articles:
- What You Should Know About the Upcoming Astrea III Notes - Part 1
- What You Should Know About the Upcoming Astrea III Notes - Part 2
- The Astrea III Bonds Today
Declaration:
For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a principal position in ASTLC 3.900% 08Jul2019 Corp (SGD) - Class A-1. The analyst who produced this report holds a NIL position in the abovementioned securities.