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Standard & Poor’s Ratings Services has assigned its “A+” senior unsecured bank loan rating to Starbound Re Ltd.’s $50 million (Debt III) bank loan, its “BBB-” senior unsecured bank loan rating to Starbound’s $50 million bank loan (Debt II subordinated to Debt III), and its “BB+” senior secured bank loan rating to Starbound’s $90 million bank loan (Debt I subordinated to Debt II and Debt III). “The differences in ratings reflect the probabilities of the debt becoming impaired,” said the bulletin.
S&P explained: “Starbound is a limited-life, special-purpose Class 3 reinsurance company domiciled in Bermuda and set up specifically to offer reinsurance to Renaissance Reinsurance Ltd. (Ren Re – rated A+/Stable/–).”
“The ratings on Starbound are based on a very remote (0.2 percent) modeled probability of even the most junior bank loan (Debt I) becoming impaired,” stated S&P credit analyst James Brender. “They’re also based on Ren Re’s strong competitive position and risk management, Starbound Re’s predetermined exposures and risk tolerances, and very strong price increases in Florida, which is about 75 percent of Starbound Re’s exposure.”
However, S&P noted: “These positive factors are offset in part by the difficulties of modeling exposure to natural disasters, which is exacerbated by Starbound’s significant concentration of risk in Florida. The lack of a strong alignment of interest between Ren Re and Starbound is a minor negative rating factor. Leverage and coverage were not considered explicitly as ratings factors because of Starbound’s use of a trust structure. However, these factors indirectly affect the modeled results for a given capital structure and premium base.
“Starbound may borrow up to $190 million from a consortium of banks for a term of about 1.75 years. The entity’s capital structure will also include $125 million of equity.
“The proceeds from capital-raising transactions will be placed in a collateral account, which will provide Ren Re with a source of indemnity cover for losses relating to its property catastrophe lines of business and other related lines. The duration of Starbound’s assets will be consistent with that of its obligations.
“Ren Re will cede 80 percent of the premium from a defined selection of its property catastrophe business to Starbound through a quota share reinsurance treaty, under which Starbound’s liability will attach simultaneously with that of Ren Re and otherwise follow the fortunes with respect to the business retroceded to Starbound.”