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IBRD / FONDEN 2017 - At a glance:

  • Issuer / SPV: IBRD CAR 113-114-115
  • Cedent / Sponsor: FONDEN / AGROASEMEX S.A.
  • Placement / structuring agent/s: GC Securities is joint structuring agent, co-manager and sole bookrunner. Munich Re is joint structuring agent and co-manager.
  • Risk modelling / calculation agents etc: AIR Worldwide
  • Risks / Perils covered: Mexico earthquakes, Mexico named storms
  • Size: $290m
  • Trigger type: Parametric
  • Ratings: NR
  • Date of issue: Aug 2017

IBRD / FONDEN 2017 - Full details

his 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.

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