IBRD / FONDEN 2017

This return to the cat bond market for Mexico’s FONDEN is being issued by the World Bank Group’s multilateral development bank, the International Bank for Reconstruction and Development (IBRD) which is facilitating the transaction through the issue of three tranches of catastrophe-linked Capital At Risk notes.

The IBRD will issue three series of catastrophe-linked Capital At Risk notes (CAR Series 113, CAR Series 114 and CAR Series 115) through its debt issuance facility, which will be sold to qualified investors and insurance-linked securities (ILS) specialists.

At launch the three tranches are seeking a total of $290 million of protection for the ultimate sponsor, which is FONDEN, although the deal has a complex series of counterparties involved, with the trustee of FONDEN technically the insured, the Mexican government-owned insurer Agroasemex S.A. sitting in between and entering into a reinsurance arrangement with Munich Re who act as ceding reinsurance firm and enter into retrocessional agreements with the IBRD.

The notes issued by the IBRD will provide FONDEN with parametric insurance protection against losses due to earthquakes and named storms on both the Pacific and Atlantic coasts. The parametric trigger features boxes for each peril, with different levels of payout possible depending on where or how powerfully an earthquake or named storm strikes Mexico.

A payout as low as 25% of the notes principal could be possible, under the terms the parametric trigger has been structured with.

The currently $120 million sized CAR Series 113 Class A notes under this issuance will provide the parametric earthquake protection, across a three-year term, and can have a 25%, 50%, 75% or 100% payout, depending on a qualifying event’s characteristics. These earthquake linked notes have a modelled attachment probability of 5.73%, an expected loss of 3.43% and are going to be marketed to investors offering a risk margin (effective coupon) of between 5% and 5.5%, we understand.

The Class B CAR Series 114 notes will provide Atlantic named storm protection and are sized at $85 million, with coverage over a three wind season term and a 25%, 50% or 100% payout possible. This tranche of notes have a modelled attachment probability of 7.97%, an expected loss of 5.56% and will be marketed offering a risk margin in a range from 9.9% to 10.5%.

The final Class C Series 115 tranche will offer the Pacific named storm protection, and are also sized at $85 million with their coverage over a three wind season term and 25%, 50% or 100% payouts possible. This tranche has a modelled attachment probability of 5.8%, an expected loss of 3.96% and will be marketed offering a risk margin in a range from 6.5% to 7.1%.

This parametric catastrophe bond transaction will provide FONDEN and the Mexican government with a source of risk transfer or insurance capacity that will be able to pay out more quickly than a traditional arrangement and with a trigger that should be relatively transparent.

The parametric box arrangement is not perhaps as simple as other parametric cat bonds, but this has been structured so as to offer the maximum protection to the areas carrying the greatest exposure for the country.

Update 1:

The target size for this cat bond has been lifted by around 24% with the deal now looking to secure up to $360 million of capital market risk transfer for FONDEN.

At the same time all three tranches of notes saw their sizes lift and their price guidance drop.

The CAR Series 113 tranche of Class A notes are now targeting $140m to $150m in size and the pricing has fallen to below the initial range at 4.5% to 5%, we’re told.

The $85 million Class B CAR Series 114 notes are now targeting $100 million of notes with risk margin guidance now lowered to 9.3% to 9.9%.

The final $85 million Class C Series 115 tranche is set to grow to $100m to $110m while risk margin guidance has been reduced to 5.9% to 6.5%.

Update 2:

The CAR Series 113 tranche of Class A notes, offering parametric earthquake protection across a three-year term secured the upper end of its target at $150m. Meanwhile the pricing was fixed at the lowest end of reduced guidance at 4.5%.

The Class B CAR Series 114 Atlantic named storm notes secured the $100 million of coverage. Pricing for this tranche settled at the bottom end of reduced guidance at 9.3%.

The last tranche of Class C Series 115 Pacific named storm notes secured their $110m targeted size. The pricing was fixed at the bottom end of guidance at 5.9%.

Update September 8th 2017:

A magnitude 8.1 earthquake that struck off the coast of Chiapas, Mexico put the World Bank supported IBRD / FONDEN 2017 catastrophe bond at risk of being triggered.

The location of the magnitude 8.1 earthquake fell within the parametric box of the catastrophe bonds $150 million Capital-At-Risk Series 113 tranche of Class A notes, which provide earthquake protection to the Mexico government.

It appears that the notes will suffer a full loss of principal, paying out the entire $150 million. The cat bond market priced the notes down for a total loss.

Update October 11th 2017:

The Mexican government confirmed the Class A tranche of notes will pay out, after the calculation agent verified that the earthquake parameters of epicenter location, depth and intensity were sufficient to trigger the bond and cause a full $150m payout.

Update October 22nd 2018:

Hurricane Willa approached Mexico with sustained winds of 155 mph and a minimum central pressure of 931 mb, putting the storm as sufficiently intense to activate the parametric trigger for the Fonden 2017 catastrophe bond Class C Pacific named storm notes.

The hurricane was forecast to maintain major status as it approaches the coast of Mexico and at 931 mb it would cause a 50% payout if that central pressure was sustained until it entered the parametric trigger zones. More details in our article breaking the news.

Update October 23rd 2018:

Hurricane Willa weakened slightly on approach to its Mexico landfall and as a result the minimum central pressure rose, taking it above the parametric trigger amounts required to cause a payout. As a result the Class C notes were safe from this particular storm.