Challenger launches $300m raise, axes dividend

The group has tapped institutional investors for a $270 million placement, as well as launching a retail share purchase plan (SPP) targeting to raise up to $30 million.

Challenger also told investors on Monday it would not pay a full dividend in September, given the uncertain economic conditions and its intention to maintain a strong capital position. It reported year to date, it has had a statutory net loss after tax of $483 million.

Japanese group MS&AD, Challenger’s major shareholder and strategic partner, will not be participating in the equity raising.

As at 31 May, the group had $2.9 billion in net assets, a $797,000 markdown from December. The raise is planned to recover $294 million.

It stated the capital raised will primarily back investment grade fixed income opportunities, with the group to maintain its defensive portfolio mix.

Challenger managing director and chief executive Richard Howes said the group had responded to the ongoing market volatility by reducing capital intensity and repositioning the portfolio to more defensive settings – increasing the cash and liquids on CLC’s balance sheet to over $3 billion.

“Following the pandemic market sell-off, fixed income asset risk premiums have widened significantly and we are now seeing opportunities, primarily in investment grade, to selectively invest this cash and liquids balance and generate pre-tax ROEs in excess of 20 per cent on the capital backing these investments,” Mr Howes said.

“This is well above our pre-tax ROE target of the RBA cash rate plus a margin of 14 per cent. Importantly, we can capture these opportunities, while maintaining our current defensive portfolio settings, with a high weighting to investment grade fixed income.”

He added the additional capital will also support the business, to keep it well placed to withstand further market volatility.

“The retirement market in Australia continues to grow and we expect to see an increase in demand for guaranteed income products, including annuities, over the medium term,” Mr Howes said.

“Our business remains well positioned to capitalise on these opportunities.”

He commented that the funds management business has performed strongly, with funds under management up 7 per cent since March.

The raise will boost Challenger Life Company’s capital position during the COVID-19 period, increasing its regulatory capital position to 1.78 times APRA’s prescribed capital amount (PCA) and its common equity tier 1 (CET1) ratio to 1.17 times the PCA.

Assuming capital is progressively deployed to back investment grade opportunities, Challenger expects its regulatory capital to return to around 1.6 times APRA’s minimum requirement.

The institutional placement is being fully underwritten by Goldman Sachs and Macquarie Capital, with shares expected to settle on Thursday.