The Challenger Ltd (ASX: CGF) share price won't be going anywhere on Monday after the annuities company requested a trading halt.
Why is the Challenger share price in a trading halt?
Challenger requested a trading halt this morning while it launches an equity raising which aims to further strengthen its capital position and provide flexibility to enhance earnings.
Challenger's equity raising comprises a fully underwritten institutional placement of $270 million and a non-underwritten share purchase plan aiming to raise up to $30 million.
These funds will be raised at $4.89 per new share, which represents an 8.1% discount to the last close price of $5.32.
Management notes that the equity raising will further strengthen Challenger Life's capital position during this period of ongoing market uncertainty. This will be achieved by initially increasing its regulatory capital position to 1.78 times APRA's prescribed capital amount and its common equity tier 1 ratio to 1.17 times the prescribed capital amount.
How will Challenger deploy these funds?
Challenger intends to prudently and progressively deploy the capital raised. This will be primarily used in investment grade fixed income opportunities that are expected to be return on equity (ROE) accretive for shareholders.
Once fully deployed, Challenger's defensive portfolio mix will be maintained, and the Life business' prescribed capital amount ratio is expected to return to around the top end of its target range of 1.3 times to 1.6 times on a pro forma basis.
Managing Director and Chief Executive Officer, Richard Howes, commented: "Challenger is in a strong capital position with the raising further strengthening CLC's balance sheet, and providing the opportunity to seek out compelling ROE accretive investment opportunities over time."
"In response to the impact of ongoing market volatility, we have reduced capital intensity and maintained a strong capital position by repositioning the portfolio to more defensive settings. This has increased the cash and liquids we have on CLC's balance sheet to over $3 billion," he added.
One positive from the market volatility is that Challenger is seeing a lot of opportunities for it to deploy capital.
Mr Howes explained: "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," he concluded.
