Avalon Re Ltd’s notes get upgraded by S&P

by Artemis on May 8, 2010

A surprising turn of events has struck the seemingly doomed catastrophe bond deal Avalon Re Ltd. After a series of downgrades and extensions by the rating agencies followed by Oil Casualty Insurance buying back as many of the notes as it could the once stricken notes have now received a credit rating upgrade from Standard & Poor’s.

The Class B notes have now been upgraded to ‘BBB+’ from ‘CCC’ by S&P. The reason for the upgrade is that following OCIL’s submittal of a final proof-of-loss claim two of the events (Lake Charles oil refinery spill and the lead paint claims) which risked investors premiums can now be discounted. The remaining event which has any bearing on the notes is the July 2007 steam pipe explosion on Lexington Avenue NY. S&P say that they are now linking the rating on the Class B notes to the rating on Oil Casualty as a premium payer under the reinsurance agreement it holds with Avalon Re Ltd.

So essentially it seems that S&P are saying that despite the possibility of losses still affecting Avalon Re the reinsurance agreement with OCIL and the agreement with Goldman Sachs as swap counterparty and guarantor there of should be sufficient to prevent any major hit to investors on this particular tranche of notes.

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