Challenger Managed Investments’ proposal to buy back the units in the Challenger High Yield Fund has raised the ire of financial planners who believe the offer undervalues investors’ stake in the fund.
Planners with clients in the High Yield Fund have been urged to consider the proposal carefully before voting, to make sure they are satisfied that the offer is in the best interests of investors.
Redemptions from the Challenger fund were frozen in 2008. An offer to buy back the units was announced in late January this year. Challenger is offering to pay 20 per cent of the redemption value of unitholders’ investment as cash, and 80 per cent as units in another Challenger fund, the Challenger Guaranteed Income Fund. This fund will in turn buy an annuity issued by Challenger Life.
Units issued in the Guaranteed Income Fund under the buyback scheme will be issued at $1 each and will offer:
• A fixed quarterly distribution amount, equal to the quarterly income payments on the underlying annuity issued to the Guaranteed Income Fund. This will be set at a per-annum rate equal to the three-year swap rate (pa) as at February 24, 2011, minus 0.50 per cent a year;
• A return of capital at maturity on March 31, 2014; and
• Limited early withdrawal opportunities at a discount to the final maturity value.
As at February 14, 2011, the “indicative earning rate” of units under the offer was 5.02 per cent a year.
“A division of Challenger wants to buy the units back at a discount. I do not see that this is in the best interest of most investors”
Professional Planner has been contacted by advisers who believe that the Challenger offer does not represent fair value for the units, particularly in light of the potential for recovery in the value of the fund’s assets in coming years.
Michael Peloquin, a financial planner with GAN Business, based at Caringbah, NSW, says he cannot “in good conscience recommend to my clients to accept the Challenger offer”.
“Clearly in putting together the deal at a 5 per cent yield, the life company has discounted the purchase [price] of the assets compared to a normal three-year yield, which may be 6.75 per cent, or possibly more,” Peloquin says.
“Investors were forced to hold onto the assets when the fund was frozen in 2008. The fund has only just this year put in a good positive return, and the asset class is recovering. And now a division of Challenger wants to buy the units back at a discount. I do not see that this is in the best interest of most investors.”
Challenger says that almost a third of the High Yield Fund’s assets have a maturity date of more than 10 years, so winding up the trust by selling down its assets and returning capital would be a long-term project. Its explanatory memorandum sets out a series of reasons that unitholders may choose to vote both for or against the buyback proposal.
It says reasons to vote for the proposal include:
- It is the best option for High Yield Fund unitholders;
- It provides certainty of capital value and distributions, via the issue of the annuity by Challenger Life;
- It provides certainty of capital return via the upfront cash payment and the issue of the annuity; and
- There’s no better offer on the table.
It says reasons to vote against the proposal include:
- Disagreement regarding the relative merits of the alternatives available to the High Yield Fund;
- A desire for unitholders to maintain investment in the High Yield Fund;
- Expectation that there may be a superior plan proposed to restructure the High Yield Fund; and
- Expectation that the High Yield Fund will be able to release additional capital than that provided under the Proposal in the period up until March 31, 2014
The independent expert’s report, prepared by Deloitte, concludes that “in our opinion the Proposed Scheme is in the best interests of CHYF unitholders”.
However, Peloquin says that, critically, the offer does not give investors an option to stay in the fund.
“If sufficient units vote in favour of the proposals, then all will be forced to accept the offer,” he says.
“A fair offer would [be to] give investors the two options: stay in; or convert to the annuity.
“Some 50 per cent-plus of the assets in the fund are due to mature in the next three years. Investors should have the option to stay in the fund and accept cash back as the assets mature.
“The current yield in the High Yield Fund is greater than the 5 per cent offered. Then, within three to five years, the life company can make an offer to take over the longer dated paper. This would be Challenger ‘doing the right thing’.”
A spokesperson for Challenger says the company is “acting in response to requests from platforms and dealer groups”.
“Some investors want liquidity while others would like to stay,” the spokesperson says.
“The feedback we’ve received is that after two years frozen, more investors want an exit than want to maintain the status quo”
“In devising a solution, the responsible entity is obliged to act in the interests of all unitholders – it can’t act to favour those who want liquidity, nor those who wish to remain invested.”
The Challenger spokesperson says that the rate to be paid from the Guaranteed Income Fund reflects the higher credit rating of the underlying assets compared to the assets in the High Yield Fund.
“What happens next is entirely up to investors, who now at least have a choice and a collective decision to make”.
“The feedback we’ve received is that after two years frozen, more investors want an exit than want to maintain the status quo. On the day of the vote the majority will rule, so maintenance of the status quo is entirely possible.
“It’s important to note that this isn’t a buyback – it’s a liquidity offer from an altogether distinct, regulated entity: Challenger Life.
“Investors now have a choice they didn’t have before: 20 per cent immediate liquidity and a three-year exit path holding a partially-liquid, A-rated credit, rather than perhaps a seven-year exit path, holding illiquid BB credit.
“A wind-up would take around seven years instead of three, with no certainty of return. Whether you call it orderly or otherwise, buyers regard you as a distressed seller and will act accordingly. Net asset value would almost certainly be hurt.”
Unitholders are due to vote on the proposal on February 24.
Now that the Hi Yield Fund was frozen for 2 years I have been REWARDED with a virtually frozen Guaranteed Income Fund instead which I am now stuck with for a further 3 years, seeing that an early redemption is heavily penalised and not a lucrative option. What’s more, the so called guarantee does not seem to be worth the paper it is written on. I am not impressed and very resentful having let Challenger have my business.