A new approach to income investing

With hybrid securities being phased out and yield harder to come by, Challenger Investment Management (CIM) has launched a new unsecured listed note (Challenger IM LiFTS 1 Notes) aimed at offering income, a layer of capital protection and liquidity in one structure.

Challenger IM LiFTs stands for Listed Floating Rate Term Securities. Pete Robinson, Head of Investment Strategy, explains:

“It’s a listed note that really is positioned to sit just outside in terms of yield of where the bank hybrid market is… and provide a defensive alternative to the listed investment trust market.”

For the full breakdown of what you need to know, watch the video or read the edited interview summary below.

What makes the Challenger IM LiFTS?

Challenger IM LiFTs are backed by a diversified portfolio of public and private credit exposures, with a focus on defensive sectors like commercial real estate, corporate lending, and asset-backed finance. 

Most of the lending is first-lien, senior-secured, and the portfolio targets a median credit rating of BB, i.e., just below investment grade.

“We’ve taken a deliberate decision to exclude development and pre-development finance. We recognise that many investors already have a lot of exposure to that.”

The note pays monthly interest at a rate of 2.75% above the bank bill swap rate (BBSW) and has a final maturity of seven years.  

Unlike LICs, Challenger IM LiFTs have a defined term, which may help reduce price volatility and uncertainty about capital return.

Risk management built into the structure

One of the more notable features is the minimum 6% fist loss buffer, that means investors start taking losses only if the portfolio losses exceed that buffer.

“LiFTS note holders won’t suffer a dollar of loss of either interest or principal until that minimum 6% is fully eroded.”

There are also income-trapping triggers: if the credit quality of the portfolio deteriorates, any excess income is retained instead of paid out. This mechanism is designed to help rebuild the buffer and protect investors.

“If the subordination drops below 6%, we start trapping income… that can add as much as 1% per annum to the overall protection provided to investors,” explains Robinson.

Why mix public and private credit?

Blending public and private credit gives the team flexibility to shift exposures depending on what’s happening in markets. Public credit adds liquidity and optionality during volatile periods. Private credit offers consistent returns and a yield premium.

“The ability to invest in public markets during times of volatility… drives the best returns we can achieve within our portfolio" adds Robinson. 

The team can also adjust the credit quality of the portfolio by dialling allocations between investment-grade public assets and sub-investment-grade private ones.

How does it compare to hybrids?

Challenger IM LiFTS aims to offer a return slightly above bank hybrids and just below LITs, but with more built-in protection and a clear maturity date.

“Currently [hybrids] are trading at low twos over cash… We’re offering a return well in excess of 50 basis points over that," says Robinson.

It will also be ASX-listed, so investors can trade in and out as needed, and monitor performance alongside their other listed investments.

“There’s always a price at which they can transact, and there’s visibility around reporting requirements," he says. "It should look and feel very similar to hybrids.”

Learn more

Challenger IM LiFTS are expected to commence trading on the ASX in September. When considering if this investment is appropriate, refer to the Target Market Determination (TMD) and prospectus which can be found here.