New Issue: Challenger Capital Notes 4

On 7 March 2023, Challenger Limited (ASX Code: CGF, the Issuer) launched an offer for Challenger Capital Notes 4 (the Notes, expected ASX Code: CGFPD), to raise $250 million, with the ability to raise more or less. The purpose of the transaction is to fund regulatory capital (Additional Tier 1) for Challenger Life Company (CLC), with the proceeds intended to refinance Challenger Capital Notes 2 (ASX: CGFPB).

These securities are structured as unsecured, perpetual, convertible, transferable, redeemable, and subordinated notes. Distributions are discretionary, non-cumulative, floating rate payments, and expected to be fully franked and payable on a quarterly basis in arrears until CGFPD are redeemed, resold, converted, or written-off. The margin is guided at 3.60% to 3.80% p.a. above 90-day BBSW. There is no obligation on CGFPD holders to pay CGF if the distribution rate was to become negative.

We have fundamental credit comfort in CGF and recommend investors Subscribe given the concession against ASX AT1 comparables and historical fair value metrics.

At the left-hand side of the guided range, CGFPD offers a 44-basis point premium to our Non-Major AUD ASX-Listed AT1 curve, which we view as incorporating a modest new issue concession of 10-30bps depending on the preferred analysis. Relative to the Big Four AT1 universe, the Offer screens as fair value, with a new issue premium to the Big Four (B4) ASX-listed curve of 97bps, which is concessional to CGFPB’s 60-basis point delta at launch in April 2017 – albeit less than the 139-basis point concession that was offered by CGFPC – but this was in more volatile circumstances.