Pacific Alliance cat bond to settle at $1.36bn, priced below guidance

by Artemis on February 5, 2018

The World Bank supported issuance of five tranches of earthquake catastrophe bonds, for the four member nations of the Pacific Alliance trade bloc in Latin America, is now going to settle at an overall transaction size of $1.36 billion, with all tranches of notes now priced at the bottom end of already reduced guidance.

The fact this large catastrophe bond that benefits four Latin American nations, three of which are first time sponsors, has seen its pricing drop so far is testament to the execution of the deal and a reflection of the diversification such deals offer to ILS investors.

At launch a few weeks ago the Pacific Alliance South American cat bond issuance was only seeking to achieve a $1 billion issuance across the five series of notes, but demand quickly resulted in an upsizing as investors oversubscribed the transaction from the off.

The Pacific Alliance catastrophe bond issuance consists of five series of earthquake-linked capital-at-risk notes, issued through the World Bank’s International Bank for Reconstruction and Development (IBRD) global debt facility to provide insurance or reinsurance protection to Pacific Alliance member nations.

Each of the series of Pacific Alliance catastrophe bond notes use a parametric triggers and will provide their protection on a per-occurrence basis, leveraging the capital markets and ILS fund investor appetites for catastrophe reinsurance risks to source their efficient sovereign risk transfer capacity.

Three of the series of notes will provide insurance protection to each of Chile, Colombia and Peru against earthquakes striking their countries, while two of the tranches will cover Mexico against earthquakes.

These are split in our Deal Directory as a Chilean earthquake bond IBRD CAR 116, a Colombian earthquake bond IBRD CAR 117, two Mexican earthquake bond series IBRD CAR 118-119 (due to the two series of notes involved) and a Peruvian earthquake cat bond IBRD CAR 120.

The IBRD CAR 116 issuance covers Chilean earthquake risk, providing insurance protection directly to the Republic of Chile. This series launched as a $300 million offering, but the target jumped and this tranche has priced at $500 million in size. Meanwhile  the initial pricing range targeted 2.75% to 3.5%, which dropped to 2.5% to 2.75%, and has now been fixed at the lowest-end of 2.5%

The IBRD CAR 117 offering, began with a $300 million target, but grew to between $375 million and $400 million of coverage for Colombia and has now achieved the upper end at $400 million. On pricing, the initial coupon guidance of 3.5% to 4.25% fell to 3.00% to 3.50%, and has now been priced at the lowest end of 3%.

The IBRD CAR 118-119 issuance for Mexico, which features two series of catastrophe-linked Capital At Risk notes launched as a CAR Series 118 Class A tranche sized at $140 million and a riskier CAR Series 119 Class B note offering sized at $85 million. The target lifted but in the end the series have priced to offer $260 million of aggregate protection, with Series 118 Class A being $160 million and Series 119 Class B $100 million.

The CAR 118 series Class A notes launched with price guidance of 3% to 3.75%, which dropped to 2.5% to 3% and has now been fixed at the lowest end of 2.5%. The CAR 119 series Class B notes launched with price guidance of 9% to 9.75%, which fell to 8.25% to 9% and has now been priced at the lowest end of 8.25%.

The last IBRD CAR 120 offering of Peru earthquake linked notes launched seeking $175 million of risk transfer capacity, a target that lifted to $200 million and has now achieved that amount at pricing. The notes launched with guidance of a risk margin in a range of 7% and 7.75%, which dropped to a range of 6% to 7% and has now been fixed at the lowest end of 6%, we understand.

So all five tranches grew over the course of the offering and pricing fell then settled at the lowest end of already reduced guidance, a clear reflection of demand for these transactions.

It’s clear evidence of the efficiency possible in the ability of the capital markets to provide insurance and reinsurance protection to sponsors such as sovereign governments at very efficient pricing levels as well, with the help of more direct risk transfer through the World Bank.

The World Bank faces off directly to governments for some of these series of notes, which makes the transaction direct, cost-efficient and a great way to execute risk transfer without the requirement for a reinsurance company in between.

More details on all of these Pacific Alliance cat bond transactions, the Chilean earthquake cat bond IBRD CAR 116, the Colombian earthquake cat bond IBRD CAR 117, the Mexican earthquake cat bond IBRD CAR 118-119 (due to the two series of notes involved) and the Peruvian earthquake cat bond IBRD CAR 120, can be found in our cat bond Deal Directory.

We understand that this transaction is set to close later this week.

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