Philippines & World Bank nearing $100m – $300m cat bond: Purisima

by Artemis on September 9, 2015

The Philippines is in the final stages of the lengthy process of working towards issuing its first catastrophe bond. Working with the World Bank, the Philippines will target an issuance of between $100m and $300m in size, according to Cesar Purisima, Finance Secretary.

The Philippines, as one of the most catastrophe exposed nations in the world given its location on the Pacific Ring of Fire and in the direct path of many of the largest typhoons, has been in discussion about catastrophe bonds with the World Bank for some years.

The country has been expected to be the next beneficiary of a MultiCat catastrophe bond, like Mexico’s, or a direct issuance through the World Bank’s Treasury unit, as it seeks to enhance its resilience to natural disasters and secure a source of post-event financing.

As we wrote last week, the Philippines is back at the table with the World Bank, discussing a catastrophe bond issuance. Now, some further information has emerged, which suggests that the cat bond negotiations are making progress and a transaction could be not far from being launched.

Cesar V. Purisima, current Secretary of the Philippine Department of Finance, discussed the progress being made on the catastrophe bond in an interview with the Philippine Star recently.

Purisima told the Star that the government of the Philippines is in the final stages of discussion on the cat bond now and that the transaction may get to market in 2015, which would be expected to amount to between $100m and $300m in size.

“The idea is that if a certain type of catastrophe hits, the bond will be extinguish of the debt, and thus, will open up the financial capability of the government,” Purisima told the Star. With the result being a source of just-in-time capital to help the government to distribute recovery funds more rapidly.

Purisima said that the government is working with the World Bank and that discussions have now got to the level of detail and late stage, where the coupon, or interest rate, that would be paid to investors in the cat bond is being talked about.

Purisima suggested that a coupon of “a little more” than a 25-year benchmark government bond rate of around 4% would be fine. That would suggest a relatively low probability of attachment for a first cat bond to come out of the Philippines, but a coupon that is aligned with much of the recent ILS markets issuance.

Any Philippines cat bond would be expected to feature a parametric trigger and likely to cover both earthquake and typhoon risks in the country. As such, at a coupon rate of somewhere over 4%, investor demand should be high for any cat bond that finally makes it to market, given the diversification that such a transaction would offer.

“We need to ensure we have the capability to respond to these catastrophes once they hit,” Purisima said, while explaining that a key goal of the Cebu Action Plan that the Philippines and other Asia Pacific country APEC members are working towards is increasing disaster resilience.

In this critical year for global climate talks, where the topic of loss and damages has become such an integral part of any deal, the use of catastrophe bonds as a way to tap the capital markets for financing to help recovery and rebuilding post-disaster is gaining in prominence.

With the government of Mexico revealing that it is planning to renew its MultiCat catastrophe bond in October, with the assistance of the World Bank, and that a Latin American regional cat bond is also being considered, it seems that the ILS market could see more than one opportunity to add some additional diversification to its portfolios this year.

The World Bank’s MultiCat catastrophe bond program has promised much, but so far only delivered the two Mexican cat bonds. Perhaps 2015 is the year we will see it expand to include new countries such as the Philippines as building resilience through the provision of catastrophe risk finance and transfer becomes increasingly important to the nations most at-risk.

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