In an Australian capital market first, an issuer of hybrid securities has converted capital notes into ordinary shares under mandatory conversion provisions.
Challenger Ltd announced yesterday that it has converted 277,380 outstanding Challenger Capital Notes (CCN1) into Challenger ordinary shares. The converted notes represent a little over 8 per cent of the original hybrid issue.
In March 2020, Challenger cancelled plans to issue new capital notes. The deal was a victim of the short-term market disruption caused by the onset of the COVID pandemic.
Part of the proceeds of the planned issue were to be used to redeem CCN1. Unable to do that, Challenger did not have available capital to redeem by the call date of 25 May 2020.
The company received APRA approval to repurchase notes on any quarterly distribution payment date up to the mandatory conversion date of May 25 this year.
Challenger issued capital notes in November 2020 and planned to use proceeds to repurchase all CCN1, but because the call date had passed noteholders were not required to participate.
As the mandatory conversion date approached, the company also offered a share sale facility, allowing noteholders to direct Challenger to assign the ordinary shares to a nominee, which would sell them on their behalf.
Nick Chaplin, a director and lead portfolio manager at BondAdviser, said there are always investors who fail to act on communications in these situations and so Challenger was left with the 277,380 notes at the conversion date.
Challenger applied a small discount on conversion in favour of noteholders, so the value of the ordinary shares at conversion was a little over A$101 for each note, compared with the $100 face value of the notes. Note holders received 13.8 ordinary shares valued at $7.33 a share for each note.
“Noteholders got a discount but now they are taking share market risk,” Chaplin said.
He said one of the changes to the terms of capital note issues, following the Challenger situation, is that they now have multiple call dates. If an issuer can’t redeem on the first call date it has other opportunities.
Other than that, there have not been any changes in terms of demand for hybrids or their pricing.
“It was an unusual circumstance, the mandatory conversion provisions were well understood and only a small proportion of note holders were affected. We haven’t seen any significant change as a result,” Chaplin said.