Standard & Poor’s Ratings Services announced that it has assigned its “BB+” credit ratings to the $160 million class A and B principal-at-risk notes issued by CAT-Mex Ltd.
“The transaction, which was sponsored by the Mexican government to finance rescue and rebuilding after an earthquake, closed on May 11, at which time ratings were assigned to both classes of variable-rate notes,” said S&P. “This is the first catastrophe bond we have rated that covers Mexican earthquakes,” noted S&P credit analyst Maren Josefs.
“Cat bonds of this type are well-established risk management tools for insurance and reinsurance companies to transfer peak risks in certain parts of the world into the capital markets,” she added. Josefs indicated, however, that “these cat bonds are also unique in that investors will lose all their investment if all the trigger conditions are met.”
S&P explained the intricacies of the securitization as follows: “CAT-Mex is a special-purpose Cayman Islands class B insurer whose ordinary shares are held in charitable trust. It issued both classes of notes and invested the proceeds in high-quality assets within a collateral account. The issuer swaps the total return of the asset portfolio with Swiss Re Financial Products Corp., in exchange for quarterly LIBOR-based payments. Simultaneous to the issuance of the notes, CAT-Mex entered into an ISDA-based counterparty contract comparable to a reinsurance contract with Swiss Re.
“This contract will provide for payments to Swiss Re if an earthquake with a certain magnitude and depth in any of three pre-defined zones in Mexico occurs. The payment received from Swiss Re under the ISDA-based counterparty contract and the proceeds from the total return swap with Swiss Re Financial Products are used to make the scheduled payments to the holders of the class A and B notes.
“Swiss Re will pay the up-front and ongoing expenses of CAT-Mex in connection with this security issuance. The ratings on the class A and B notes are based on the creditworthiness of Swiss Reinsurance Co. (Swiss Re; AA/Watch Neg/A-1+) as payer under the ISDA-based counterparty contract and as guarantor of Swiss Re Financial Products, the total return swap counterparty.”
S&P also noted that a “significant part of the rating analysis took account of an assessment of the occurrence probabilities of Mexican earthquakes as modeled by AIR Worldwide Corp.”
Continuing its analysis of how the arrangement will function, S&P said: “The proceeds of the notes will serve to provide Swiss Re with a source of parametric cover for earthquakes in Mexico over a three-year period in connection with an insurance agreement that Swiss Re has entered into with the Natural Disasters Fund of Mexico.
“For either class notes to trigger, the ‘Secretaría de Gobernación’ (Ministry of the Interior) needs to also have publicly issued a state of emergency declaration following the occurrence of an earthquake. If all of the specified trigger conditions are met, 100 percent of the principal amount of that class of notes is paid to Swiss Re and the respective noteholders lose their entire investment.”
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