Challenger (ASX: CGF) has announced that it intends to do a capital raising, should you take part?
What is Challenger?
Challenger is Australia’s largest provider of ‘annuities’, which are financial products typically sold to retirees who seek reliable income. Challenger was established in the mid-80’s and listed on the ASX in 1987. In 2018, Challenger managed more than $90 billion between its investment portfolio, which is the sum of the money invested by retirees who buy annuities, and its fund management business.
What did Challenger announce?
The annuity business has announced that it is going to launch a capital raising to strengthen its capital position and provide flexibility to enhance earnings.
The money will further strengthen Challenger Life Company’s (CLC) capital position during this period of ongoing uncertainty by initially increasing CLC’s regulatory position to 1.78x APRA’s prescribed capital amount (PCA) and CLC’s common equity tier 1 (CET1) ratio to 1.17x the PCA.
Challenger intends to “prudently and progressively” deploy the money into ‘investment grade’ fixed income opportunities which are expected to be return on equity (ROE) accretive for shareholders. In other words, the opportunities may produce stronger ROE returns than Challenger currently is.
Managing Director and CEO Richard Howes said: “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% on the capital backing these investments. This is well above our pre-tax ROE target of the RBA cash rate plus a margin of 14%. Importantly, we can capture these opportunities, while maintaining our current defensive portfolio settings, with a high weighting to investment grade fixed income.”
Final FY20 dividend off the cards
Challenger said that given the uncertain economic conditions, investment market volatility and intention to maintain a strong capital position while optimising earnings, the Challenger Board’s current intention is that no final FY20 dividend will be paid in September 2020.
The capital raising
Challenger is going to do a fully underwritten institutional placement to raise $270 million. It will be done at a price of $4.89 per share, which represents an 8.1% discount to the last closing price.
The annuity business will then look to raise $30 million from a share purchase plan from regular investors.
Time to buy?
These discounted capital raisings can prove to be good opportunities for people who take part in them. The prospect of a pre-tax ROE of more than 20% is clearly attractive, so it seems like shareholders will be a net beneficiary of the raising. If you want to increase your Challenger holdings then I’d be willing to take part at this cheap price. But I’d be wary of interest rates remaining lower for longer than expected.
[ls_content_block id=”14945″ para=”paragraphs”]
Disclosure: At the time of writing, Jaz doesn’t own shares in any of the businesses mentioned.
