Challenger Limited launched a A$250 million hybrid note issue yesterday. The issue was flagged in its full year results announcement last week, and follows upsizing of CBA's PERLS VII hybrid note issue to $2.6 billion, from $2.0 billion, the day before.The response from the brokers involved in the bookbuild for the Commonwealth Bank's PERLS VII notes was that investors simply couldn't get enough higher yielding product. As a result the issue was not only upsized (and will probably be upsized again before it closes on September 19), the credit margin for dividend payments was set at 280 bps - the tight end of the 280 bps to 300 bps indicated range.Challenger is no doubt looking to tap into that demand - but Challenger is not the Commonwealth Bank. And Challenger's Capital Notes, as they have been called, are not the same as the PERLS VII notes.Challenger is a non-operating holding company of an investment management group that manages more than $50 billion of assets through its core operating subsidiary, Challenger Life Company. Challenger will be the issuer of the notes but the funds raised will be used as Additional Tier 1 capital for CLC.Challenger is rated BBB+ by Standard & Poor's. If the capital notes were to be rated, S&P would rate the notes at least three notches below the rating assigned to Challenger.This places the notes in the sub-investment grade category.Being issued by an insurance group, no capital event trigger attaches to the notes, only a non-viability trigger.In other respects the structure of the capital notes is similar to the PERLS VII. Dividends are discretionary and non-cumulative, and the notes are subordinated and perpetual but can be converted into ordinary equity or redeemed. The redemption or Optional Exchange date is 5.75 years away, in May 2020. Mandatory conversion must occur in May 2022, provided the conversion conditions are met.While the dividends payable on Challenger's Capital Notes can be fully franked, Challenger expects that they will not be. Challenger is anticipating that the dividends will be franked to only 70 per cent, at least initially.This will be disappointing for investors who highly value franking credits. But those who prefer cash upfront will be better off.Challenger has set the credit margin on the dividend payments at 340 bps to 360 bps over the 90 day bank bill rate. Using Challenger's example, a margin of 340 bps would currently result in a pre-tax yield of 6.035 per cent per annum.In this case, investors in the Challenger Capital Notes are being offered a rare opportunity to earn a yield that is higher than that paid on its ordinary shares. Allowing for 70 per cent franking the yield on the shares comes out at just 4.34 per cent pre-tax.However, is a yield of 6.035 per cent sufficient to compensate for the credit risk of a sub-investment grade note and the mixed benefits of 70 per cent franking?There are only a few other hybrid notes issues that can provide a comparable pricing benchmark.Bank of Queensland's