The Pylon II Capital Ltd. catastrophe bond that was issued in 2011 on behalf of ultimate sponsor energy firm Électricité De France (EDF), is to be redeemed early as at the latest reset the trigger levels had decreased.
Pylon II Capital was seen as a groundbreaking catastrophe bond transaction. Ultimately the cat bond provided corporate insurance protection for Électricité De France’s (EDF) aerial electrical distribution network and infrastructure, operated by its subsidiary Électricité Réseau Distribution France (ERDF), against damage and disruption created by European windstorms.
The cat bond featured a parametric index, designed and calculated by risk modelling firm EQECAT, to efficiently and transparently allow the cession of the aerial distribution network exposure to European windstorm risk to the capital markets through the Pylon II cat bond trigger.
The €150m of Pylon II Capital cat bond notes face an annual model-based reset, at which the exposure is recalculated and the trigger levels adjusted if necessary. The transaction featured an early redemption clause allowing EDF to redeem the notes if after a reset the trigger level dropped or increased by 25% or greater during the term of the transaction.
According to rating agency Standard & Poor’s the trigger level has decreased by more than 25% at the recent reset. As a result, S&P has received reset reports and early redemption event notices for the two tranches of catastrophe bond notes issued by Pylon II Capital.
So both the €85m class A and €65m class B tranches of principal-at-risk, variable-rate notes issued by Pylon II Capital Ltd. are to be redeemed early on the 15th September 2015. The early redemption event comes into effect on the 5th August and at that point the risk period for holders of the Pylon II Capital notes will end.
The reset was based on EQECAT’s latest European windstorm model version, featuring an updated stochastic event set. It’s assumed that either the exposures themselves had changed, or the change to the model event set resulted in the drop in trigger levels and attachment probability.
That likely makes the risk transfer the cat bond provides less valuable or cost-effective to EDF, as a result making the early redemption a useful option.
The notes issued by Pylon II Capital had been scheduled to mature on the 5th May 2016. It will be interesting to see whether EDF may choose to return to cat bonds, this transaction was the firm’s second deal after its 2003 Pylon Ltd. transaction.
Given conditions in the catastrophe bond and insurance-linked securities (ILS) market, it’s likely that EDF could sponsor a repeat of a parametric European wind cat bond at a significantly lower cost over the duration of a new deals protection.
That could encourage EDF back, depending on how a cat bond would fit within its corporate risk management structure now and what terms it could get through a traditional insurance placement instead.