S&P Puts Munich Re Sidecar Aiolos on CreditWatch/Negative

Standard & Poor’s Ratings Services has placed its “BB+” senior secured debt rating on the €110 million ($142 million) variable-rate notes issued by Aiolos Ltd. on CreditWatch with negative implications.

S&P explained that Aiolos “is a special-purpose reinsurance company, the notes of which are linked to European windstorm.” Windstorm Kyrill, which moved across Europe between Jan. 17 and 18, could therefore be a “covered event.”

Specifically S&P put its ratings on CreditWatch because Munich Re, “as counterparty to an ISDA-documented contract with Aiolos, has notified Aiolos that it wants to determine if Kyrill is a covered event.

“Risk Management Solutions Inc. (RMS), the calculation agent for the transaction, will perform an event calculation per the offering circular of the notes and report its results by March 12, 2007.”

S&P expects to resolve the CreditWatch when RMS releases its findings. “If RMS reports that the windstorm index value associated with Kyrill is at least 1002.3, the notes will become subject to principal reduction,” S&P explained. “If the windstorm index value is 1023.6 or greater, the outstanding principal amount will be reduced to zero. If the windstorm index value is less than 1002.3, then the rating on the notes will be removed from CreditWatch and affirmed.”

The rating agency added that based on the discussions its had “with parties related to the transaction,” it doesn’t anticipate that the windstorm index value will exceed 1002.3 and that it will affirm the rating, “though the possibility exists that noteholders could lose principal.”