It’s not every day in Singapore that investment bonds make headlines, so it’s rather remarkable that Astrea IV bonds are in the news lately. Launched by Temasek Holdings subsidiary, Azalea Asset Management, these bonds are a unique form of investment in Singapore. Here’s the low down on Astrea IV bonds.
What’s the big deal about Astrea IV bonds?
For the uninitiated, Singapore bonds traditionally came in two flavours: either Singapore government bonds (money that you lend to the government, such as Singapore Savings Bonds) or private equity bonds (money that you lend to private firms, sometimes in exchange for a controlling stake in the company).
The dichotomy between them is kind of like HDB housing vs private property. One is affordable and accessible to the Singaporean masses, while the other is ridiculously expensive and only for the ultra-elite.
Now, imagine the bond equivalent of an executive condominium – a product that’s nicely sandwiched between the two. That’ll give you an idea of what Astra IV bonds are like. And why, just like ECs, they’re so talked-about.
Here’s a brief comparison of the 3 types of Singapore bonds:
|Factor||Singapore Savings Bonds||Astrea IV Bonds||Private equity bonds|
|Minimum investment||$500||$2,000||$250,000 or more (depending on type)|
|Tenure||1 to 10 years||5 to 10 years (shorter if you trade on SGX)||10 years or more|
|Interest payments||Every 6 months||Every 6 months||Depends|
|Expected annual return||Currently 1.68% to 2.43% (depending on tenure)||4.35% (if redeemed after 5 years) or 5.35% (thereafter)||Can be very high, as much as 14%|
|Are returns guaranteed?||Yes||No||No|
|Tradeable on SGX?||No||Yes||Depends|
|Overall risk level||Virtually none. Tied to Singapore government||Fairly low. Highly diversified (596 companies)||Risky. Not diversified (only 1 to 10 companies)|
In brief, if you’ve graduated from Singapore Savings Bonds (i.e. you’ve either maxed it out at $100,000 or are willing to take on more risk), Astrea IV bonds are a suitable “next level up” bond option.
What is a private equity bond, exactly?
Put simplistically, a bond is an investment asset where you (the investor) lend money to a company or government.
It’s like when you take out a bank loan, but in reverse. Because you’re the moneylender, you get to enjoy interest payments. These usually take the form of regular payouts throughout the loan tenure. At the end of the tenure, you will get back the original amount (principal sum) you lent them.
So when you buy a Singapore Savings Bond, for example, you’re lending money to the Singapore government and they’re paying you interest on the loan.
When it comes to private equity bonds, the debtor is either one or many private companies.
Private equity bonds can offer much better returns than government bonds or even index funds like the Straits Times Index, which track the overall stock market’s performance. In some cases, they can even give the bond holder a controlling stake in the company.
Unfortunately, private equity bonds have typically been out of reach for regular people like you and me. They usually require immense sums of money ($250,000 and up) and long holding periods (10 years), so all this time they have only been available to organisations and crazy rich investors.
So what’s different about Astrea IV bonds?
Astrea IV bonds are supposedly a game changer on the “bond scene” because they’re the first of its kind in the market with such a low entry point. With a minimum investment of $2,000, it doesn’t take that much to start investing in it.
The tenure of 5 years is much shorter compared to typical private equity bonds too. You can redeem your bond after 5 years and get back your principal.
Should you need cash during that 5-year period, for whatever reason, you can also choose to liquidate your investment by selling it off on the stock market. Astrea IV bonds are the first private equity bonds to be listed on SGX.
Part of the fuss is also due to its pedigree. It’s launched by Temasek Holdings’ subsidiary, Azalea Asset Management. Known for being in bed with the Singapore government, Temasek Holdings is a name that reassures most Singaporeans. However, understand that Astrea IV bonds are not guaranteed by Temasek Holdings or Azalea Asset Management.
Nonetheless, Astrea IV bonds are regarded as relatively low risk, because the portfolio is highly diversified, covering a whopping 596 companies worldwide, in various sectors.
What kind of returns can I expect?
The biggest selling point of Astrea IV bonds is the expected (but not guaranteed) returns of 4.35% per year. There will be a payout of this every 6 months, similar to Singapore Savings Bonds.
After 5 years (14 Jun 2023), the bond officially matures and you can choose to redeem the principal sum. At this point, if the overall bond performs well, bond holders can get a bonus 0.5% together with the principal when they redeem. Again, no guarantees.
If you don’t redeem the bond after 5 years, the returns will increase by 1% p.a. (one time only). After 10 years (14 Jun 2028) the bond reaches its final maturity and you cannot hold on to it anymore. You’ll have to redeem it then.
Here’s a quick and easy look at the expected returns over the entire period:
|Tenure||Expected annual returns|
|Year 5||4.35% + possible 0.5% “performance bonus” if you redeem|
|Year 6 to 10||4.35% + 1% “step up” interest|
Astrea IV bonds are more suitable as a passive income vehicle rather than for capital gains.
Although they will be listed on SGX, you can’t bet on trading to help you make money. Not a whole lot of people buy and sell bonds on SGX in the first place, at least not at the scale of regular stocks and shares. Of course things might be different with this new game-changer on the scene, but don’t count your chickens before they hatch.
But are Astrea IV bonds safe?
There are some inherent risks when it comes to buying any sort of private equity bond. The bond price might fall for whatever reason, the funds that comprise the bond might have cash flow problems, a financial crisis could hit… anything can happen.
Don’t forget that nothing is guaranteed – not your interest payments, not even your principal.
Neither Temasek Holdings nor Azalea Asset Management will take full responsibility for any losses, no matter how many angry Facebook comments you leave on their pages.
However, the Astrea IV bonds’ main safety net is diversification. The portfolio actually made up of 36 funds, which in turn cover 596 firms across different regions, business types and industries. The chances of all 596 companies failing is pretty damn low.
Of course, you can’t compare private equity bonds (no matter how diverse) to Singapore Savings Bonds. Private companies are fallible, while the Singapore government is… well… not infallible, but close. In terms of credit rating, the Singapore government gets AAA while Astrea IV gets Asf – still an “A”, just not an “AAA”.
How do I get my hands on Astrea IV bonds?
From now till 12pm on 12 Jun 2018 (Tue), you can apply for them through DBS/POSB, OCBC or UOB internet banking or ATMs. The minimum investment is $2,000. You can only pay in cash – you cannot use CPF or SRS for this.
If you miss this “IPO”, don’t worry. The bonds will be listed on SGX from 18 Jun 2018 (Mon). You can then buy them just like you would ordinary stocks on the stock market.