Muteki Ltd. catastrophe bond triggered by Japan earthquake confirmed as total loss

by Artemis on May 7, 2011

Finally confirmation has emerged that the $300m Muteki Ltd. catastrophe bond issued in 2008 by Munich Re on behalf of Japanese cooperative Zenkyoren is a total loss after being triggered by the 11th March earthquake off the coast of Tohoku, Japan. The market has been expecting the loss and it’s been priced in to the secondary market and funds portfolios but official confirmation had not been made public.

Ratings agency Moody’s had downgraded the $300m of Muteki Ltd’s Series 2008-1 from ‘Ba2′ to ‘C’ at the end of March and said that they expected it to be a total loss. That gave the market time to digest the news and absorb and adjust to the losses that were expected. Pricing on the notes issued by Muteki dropped dramatically in the secondary market, affecting the various indices which measure cat bond pricing and returns. Specialist cat bond investment funds have also seen declines in the value of their portfolios and lower returns over March and April as the impact of expected losses affected the positions of many catastrophe bonds.

Now, the Cayman Islands Stock Exchange which is where Muteki’s notes are listed, have published the event report issued by calculation agent AIR Worldwide on the 27th April. The report says that AIR Worldwide received an event notice from Muteki Ltd. on the 4th April, asking them to perform the necessary calculations to discover if the earthquake in Japan had triggered the deal. AIR performed the necessary analysis and modelling and delivered their verdict in the event report.

According to the report, AIR Worldwide have determined that the earthquake has exceeded the Event Attachment Index Value of 984 which was required to trigger Muteki. AIR recorded the Index Value as 1,815 almost double the index value required to activate the parametric trigger and well exceeding the exhaustion point of 1,400 (at which point it became a total loss). That means the event constituted a dropdown event of 100% making Muteki Ltd. a total loss.

Under the terms of the cat bond transaction, Muteki Ltd. will make a payment of $300m to Zenkyoren which will contribute towards their losses.

So, the Japanese earthquake has caused a total loss default of one catastrophe bond. We expect that Moody’s will further downgrade the notes of Muteki Ltd. to junk status in light of this news and the transaction will be wound down as all investor principal has been lost.

Update: Please see the comments below for an update from Moody’s explaining that the rating will not be downgraded any further.

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Rodrigo Araya May 12, 2011 at 1:40 pm

The last paragraph on this article is inaccurate: the lowest rating in Moody’s classification is C and no further rating action is then warranted. Moody’s anticipated that the Muteki bond was going to be a total loss in late March and consequently, downgraded the notes to their current level. Moody’s will not take any further action until the deal is terminated.

Steve Evans May 12, 2011 at 1:57 pm

Thanks for clarifying that point Rodrigo. Great to have your input!

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