If the reserves account cap is met but the loan-to-value ratio still exceeds 50%, the remaining cash flows will be diverted to the redemption of the outstanding principal amount of the Class B bonds, until the loan-to-value ratio is brought below 50%.

Explanation: This feature ensures that the bonds issue do not become over-leveraged. In the event that it does (e.g. from a write-down of private equity funds from poor performance), certain transactions will occur such as the redemption of the Class B bonds.

The ensuing cash flow will be paid to the reserves account to ensure that retail bondholders are paid back.

4. Liquidity Facility

Astrea IV has a liquidity facility in place with DBS. The liquidity facility allows Astrea IV to call on funds to pay off certain expenses (including coupon payments) in the event of a cash shortfall. This ensures that investors will be able to obtain their coupon payments even if the illiquid nature of the underlying private equity portfolio does not yield free cash flows.

Explanation: A liquidity facility is simply a line of credit that Astrea IV can tap on to pay investors in case there is a time lag in distribution of cash from the private equity funds.
Exits from private equity investments are inherently unpredictable as they depend on exiting via IPOs or selling to an external buyer. It is the same issue as selling a property – it really depends on market conditions. The lumpiness of these cash flows is mitigated as Astrea IV can simply borrow the money from DBS in the short run to pay the interest due on its bonds.

5. Capital Call Facility

Apart from the liquidity facility, Astrea IV also has a capital call facility in place. The capital call facility allows Astrea IV to draw down on the facility to pay for capital calls from the underlying funds if there is a shortfall in Astrea IV’s available funds. This ensures that there will be no penalties or missed opportunities for Astrea IV should there be a capital call from the underlying funds.

Explanation: Astrea IV still has capital commitments that are unfulfilled. The way that a private equity fund works is that cash is only “called for” when an investment opportunity surfaces.
In layman terms, think of it as joining a group of buyers to buy property. The money from each buyer is only required to be paid when a property is found. Until then, you do not have to put up the cash.

The same analogy applies in this case, and Astrea IV still has certain ‘capital commitments’ in the event a good opportunity surfaces and one of their private equity funds wants to deploy the cash. The capital call facility allows Astrea IV to borrow money from the bank to meet this commitment.

It’s important to note that because of this, the loan-to-value ratio may increase and thus there is the safeguard explained earlier on ‘maximum loan-to-value ratio’.

In general, the structural safeguards from Astrea IV’s bond issuance provides investors with a fair amount of protection. The reserves account structure coupled with the sponsor sharing and maximum loan-to-value features allow for timely and prompt built up of reserves to ensure that there will be funds to redeem the Class A-1 and Class A-2 bonds.

The liquidity facility and capital call facility ensures that Astrea IV will not face any issues with cash flow given the illiquid nature of the underlying private equity portfolio. These structural safeguards should provide comfort to the retail investors to invest in the bonds and not have to worry about the illiquid nature of the underlying portfolio.

Related: Antares Fixed Income Manager Discusses Current Volatility

Ending Thoughts

It’s clear that a lot of thought was put into the structuring of the bonds, especially with regards to the structural safeguards. There a distinct lack of quality bond issues in the market. We welcome the addition of the Astrea IV bonds the investor’s portfolio. Our own opinion is that any risk of real default is small, and in light of this, the yield offered to investors far compensates them for any risk taken.

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