MultiCat cat bond downgraded to default, uncertainty on loss remains

by Artemis on December 8, 2015

Uncertainty is still the order of the day when it comes to the size of the loss faced by investors in the $100m Class C tranche of the MultiCat Mexico Ltd. (Series 2012-1) catastrophe bond due to the impact of hurricane Patricia.

ILS investors exposed to the potential loss of the MultiCat Mexico Class C notes, after hurricane Patricia tore ashore in Mexico as a deadly and powerful hurricane, will be hoping for some certainty soon to establish whether the notes are facing a complete loss, or a 50% loss of principal.

It seems impossible for the notes to escape a loss altogether, based on the initial estimates of central pressure which the NHC put within the parametric trigger zone for the notes at the time of landfall at 920mb, which would signal a 100% loss.

However adding to the uncertainty, a storm chaser in Patricia’s path captured higher central pressure readings which suggest that the hurricane’s pressure must have risen rapidly after landfall. This data still points to a 50% loss of principal for the MultiCat cat bond notes, but raised uncertainty over a 100% loss.

Ratings agency Standard & Poor’s has now downgraded the MultiCat Mexico Class C cat bond notes to ‘D (sf)’ (default) from ‘CCC- (sf)’ and has removed them from CreditWatch.

The reason for the default is that sponsoring reinsurance firm Swiss Reinsurance Co. Ltd. (Swiss Re) has requested an extension of the maturity of the notes. The notes had been scheduled to mature on the 4th December 2015, but has been extended for the final calculation report to be created once the final data is available from the National Hurricane Center.

As a result, the maturity will now automatically be extended one month at a time up to June 2016, unless Swiss Re requests the maturity not to be extended anymore which will be once the final report has been released and a decision made as to what loss investors will face.

The extended maturity situation means that investors holding the notes will receive a reduced coupon payment, of 3% rather than 7.5%, until the notes pay out or are matured with no payout. S&P notes that it considers this “a coupon stepdown and we have therefore lowered our rating on the class C notes to ‘D (sf)’.”

There remains significant uncertainty in the amount of loss that investors will face. Until the final data is released by the NHC in its tropical cyclone report and the final event report published by calculation agent AIR Worldwide, it’s really not possible to be fully sure which loss level will be suffered by investors.

S&P notes that it has reviewed some of the NHC’s data which the rating agency said “indicated a reading of 920 millibars at one station located at 19.4N 105.0W, which falls within the covered area.”

Note, it’s unclear whether S&P means that this is new data, or simply that it has reviewed the original data reported at the time hurricane Patricia struck. We can’t find any new data release from the NHC currently. At the time of landfall, the NHC reported a central pressure at landfall of 920mb. But as we said at the time, this preliminary data can be subject to revision, as we saw with Odile a year ago. Update: S&P confirmed that this is simply the original landfall data.

A 920mb pressure reading within the parametric trigger zone would indicate a 100% loss of the $100m of principal. However, anything above 920mb up to 932mb would indicate a 50% loss of principal. Hence the uncertainty, especially given the amount that pressure readings have been amended in final tropical cyclone reports before.

So we don’t feel that investors can feel any clearer in the fate of the bond yet, but the final report from the NHC should only be a matter of weeks away and after that the calculation should be made quickly and the decision made as to what loss investors in the MultiCat Mexico 2012 catastrophe bond face.

Read our coverage of hurricane Patricia and the MultiCat catastrophe bond:

Speculative investors buy MultiCat cat bond, in hope not a full loss.

S&P downgrades MultiCat cat bond notes on default expectation.

Pressure recordings show uncertainty in MultiCat cat bond loss.

S&P put MultiCat Mexico Class C notes on negative watch post-Patricia.

MultiCat Mexico cat bond facing hurricane Patricia loss, but how much?

Cat bond market pricing MultiCat Class C for potential loss.

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