S&P updates two criteria with relevance to catastrophe bond ratings

by Artemis on June 27, 2013

Ratings agency Standard & Poor’s has published two updated structured finance rating criteria reports, both of which have some relevance to anyone involved in issuance of catastrophe bonds. Updates aren’t major in either case, but it is worth casting an eye over the reports to ensure you are familiar with the latest thinking from the most prevalent rating agency of cat bonds.

The first update is to S&P’s general Counterparty Risk Framework Methodology And Assumptions criteria. This criteria is all about counterparty obligations, the effect on ratings should a counterparty be replaced, what would happen should a counterparty rating be reduced and establishing a link between the rating on a security and the minimum eligible counterparty rating for a specific counterparty obligation.

This criteria has been updated to explicitly discuss the types of transactions to which these criteria apply and one of the transaction types named explicitly is catastrophe bonds. Hence we recommend you ensure you’re familiar with the criteria if you’re involved in catastrophe bond issuance or even if you’re an investor in cat bonds with any interest in how counterparty ratings are factored into a deals rating.

The second update is to S&P’s Global Derivative Agreement Criteria. Again these criteria are relevant to anyone involved in catastrophe bond issuance, and any interested investors, and the criteria applies to S&P’s analysis of derivative agreements within structured finance transactions such as cat bonds.

This criteria is about the derivative cash-flows of the issuer, hedging issues and anything that could result in an issuer being exposed to becoming undercollateralized. The criteria also includes anything related to ISDA Master Agreements and total return swaps. However this criteria will likely not feature too often in a cat bond issuers list of worries when preparing a deal, but it is something to ensure is understood and factored in.

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