Cat bond market pricing MultiCat Class C for potential loss

by Artemis on October 23, 2015

The catastrophe bond market seems to be on the verge of accepting that the $100m of MultiCat Mexico Ltd. (Series 2012-1) Class C catastrophe bond notes are destined for a loss, given hurricane Patricia’s continued approach as a major storm towards the parametric trigger zone.

Update 24th October:
MultiCat Mexico cat bond faces hurricane Patricia loss, but how much?

Original article continues:

Hurricane Patricia forecast path or track to Mexico (from Weather Underground)The latest NOAA update at 11am EDT, or 4PM UK time, shows hurricane Patricia still packing 200mph sustained winds, 245mph gusts and a minimum central pressure of 880mb with little weakening expected.

It seems increasingly unlikely that the pressure will rise back above the 920mb point to only see a 50% loss of principal, even less likely that it will rise to above 932mb for no loss at all to be suffered by investors in the tranche of cat bond notes. That makes a 100% loss of principal to the notes currently the scenario that wins out in our discussions with investors and cat bond traders.

Investors we’ve spoken with today, some of which actually hold the notes, are hoping for a clear-cut breaching of the parametric trigger if a loss is on the cards. One investor told us they were not concerned about the possibility of a small loss from this hurricane to their portfolio, but what would concern them is a protracted payout, especially after Odile.

We understand that one desk has the Class C notes marked at a price around 20 (so down 80% from par), which is a typical level that a distressed asset could be sold at to a speculative investor, if any were to be found.

However the cat bond traders we’ve spoken with today all said that they haven’t seen any trades completed and enquiries have been scarce as well, which they agreed suggests that the ILS investors and ILS fund managers are preparing themselves for a loss and don’t expect any buyers to be interested at any price currently.

The fate of the $100m MultiCat Mexico 2012 Class C notes may become clearer later this evening, if hurricane Patricia continues towards the coast of Mexico with little weakening. We’re unsure of the exact calculation process, regarding the need for NHC best track data to be used as happened with Odile, but it could be that the final decision takes a while longer to be made.

It would be positive for the market if it could speed any decision, particularly given the intensity of hurricane Patricia. The risk capital tied up in the notes could be put to good use in disaster recovery and reconstruction.

It’s also worth noting that at the current intensity hurricane Patricia could cause a sizable insurance loss for the region it hits, which as always means the potential for reinsurance, retrocession and possibly ILS fund exposure through collateralised reinsurance or retro deals. So the ILS market could ultimately take more of a loss from hurricane Patricia than just from the MultiCat Class C notes, if the damage was particularly severe.

But it does seem at this stage that catastrophe bond and insurance-linked securities (ILS) market and investor opinions are converging on the fact that this bond almost certainly faces a loss (note, almost, nothing is guaranteed).

The NHC’s latest update says; “Some fluctuations in intensity are possible today, but Patricia is expected to remain an extremely dangerous category 5 hurricane through landfall.”

Through landfall, which means into the parametric trigger zone. If that is indeed the case and Patricia doesn’t weaken, it seems highly unlikely that the MultiCat Mexico Ltd. (Series 2012-1) Class C notes can escape being triggered this time.

For the latest tracking map and data on hurricane Patricia see our previous article here.

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