Deal of the year; Singapore house of the year: Credit Suisse

Structured Products Asia Awards 2017: Careful groundwork and investor transparency enabled the bank to reopen Singapore’s securitisation market through the issuance of private equity bonds

Marc Freydefont, Credit Suisse

In June 2016, as global financial markets focused on the historic UK referendum on membership of the European Union, Credit Suisse made its own small slice of history by effectively reopening the securitisation market from Singapore with the structuring of a landmark US$510 million private equity transaction.

Azalea Asset Management, a subsidiary of Singapore state investment company Temasek Holdings, had sought Credit Suisse’s help in 2015 to make its private equity portfolios available to investors through a sophisticated securitisation deal. The bank’s experience in asset-backed securities (ABSs) put it in a strong position, but it had been at least a decade since a deal of this kind had been structured.

“Investors pulled away from structured finance and ABSs after the global financial crisis, so this transaction effectively meant reopening the esoteric private equity ABS market globally, which had been dormant for the past 10 years. Our biggest concerns in advance were around the ratings process, as well as how we would attract investors to the transaction,” says Marc Freydefont, senior director for global market solutions at Credit Suisse.

The transaction, issued through Azalea’s Astrea III vehicle, comprised four tranches of Singapore dollar and US dollar-denominated private equity bonds, each with a different size, interest rate, seniority and repayment profile and thereby designed to appeal to a range of investors. As in a typical securitisation, the senior notes carry a higher rating, while the junior tranches become progressively more risky, with a higher coupon.

Pricing the transaction involved reopening dialogue with the rating agencies, which have undergone significant restructuring since the financial crisis. After detailed, long-running discussions about the transaction, the senior class was A-rated by both Fitch Ratings and Standard & Poor’s (S&P), while the A-2 and B classes were rated A and BBB, respectively, by Fitch. In a clear sign of success, Fitch upgraded the senior notes to A+ in July 2017, while S&P has placed the same tranche on watch for an upgrade.

“It took a long time to convince the rating agencies that they should rate the product, and they have had to develop new methodologies for this kind of transaction,” says Freydefont. “The recent upgrade by Fitch Ratings is a reflection of the performance of the underlying private equity assets, which has been extremely strong in terms of cashflow performance.”    

Success was by no means inevitable, however. While Credit Suisse had arranged private equity ABSs in the past and therefore had the necessary experience, such deals had been predominantly based in the US and Europe, so the bank faced the challenge of trying to convince investors to step back into the market with an Asia-based deal.

In collaboration with DBS, which had also been appointed as placement agent for the transaction, Credit Suisse organised three so-called ‘pre-sounding exercises’ with potential investors in October 2015, January 2016 and April 2016. Interested parties would be asked to sign a non-disclosure agreement and then details of the proposed transaction would be shared to test market appetite. 

“Even the last of the pre-sounding exercises proved inconclusive in terms of investor demand and I was still not sure whether we would have a full book. People were intrigued and asked questions, but we were still unsure about the real appetite for these private equity bonds. When we launched publicly in June and went on a roadshow, we were taken by storm and the order book was eight times oversubscribed,” says Freydefont.  

Despite the prior uncertainty, going public clearly had a very positive impact on the project as Credit Suisse was able to be much more open about the structure of the deal, explaining the rating agency process and using Temasek’s strong reputation to bring investors onboard.

Hedging was also needed for the transaction, as the senior tranche was denominated in Singapore dollars, so a cross-currency swap was incorporated into the transaction, while foreign exchange forwards were used to hedge the euro cashflows in some of the underlying private equity funds.

“At this point we had all of the documentation in place, which had been lodged with the Monetary Authority of Singapore. We took the managers from Temasek with us on the roadshow so that investors could see the strength of the team and the thought that had gone into the construction of the portfolio and the hedges we had put together,” Freydefont explains.  

The final transaction referenced a pool of 34 private equity funds managed by 26 well-known firms, including TPG, Blackstone and Silver Lake. The institutional investor base spanned insurance companies, endowment funds and individual investors, and the deal marked a major milestone for Singapore in giving investors exposure to a diversified pool of private equity assets.

“Astrea III has been a very significant deal and I see the potential for this asset class to reopen on a more permanent basis. We have had a number of discussions with other counterparties, and Temasek has been open with investors about the fact that they want to continue to engage in the programme,” says Freydefont.