The Mexican government has confirmed that it will receive a $150 million payout from the World Bank supported IBRD / FONDEN 2017 catastrophe bond (as Artemis was first to reveal on the 8th September) after the calculation agent confirmed that the earthquake on 7th September met all the parameters required to trigger and default the tranche of cat bond notes.
The parametric Fonden 2017 catastrophe bond issuance was only completed on the 4th August, a $360 million issue providing the Mexican government with a source of disaster risk financing and insurance for losses caused by hurricanes and earthquakes.
The cat bond quickly faced threats in this heavy catastrophe year, with the deal having a close shave with hurricane Harvey on 27th August, but then the 7th September magnitude 8.1 earthquake in the Chiapas region of Mexico immediately looked to have triggered the bonds earthquake exposed tranche of notes.
Now the Ministry of Finance & Public Credit of the Mexican government has confirmed in a statement that it expects to receive a full payout of the earthquake exposed $150 million Capital-At-Risk Series 113 tranche of Class A notes from the transaction.
The Ministry said that, “The verification agency specified that all the parameters (epicenter location, depth and intensity of the earthquake) are sufficient to issue the payment of 150 million dollars, which represents 100 percent of the bond.”
After the earthquake struck on the 7th September, the Mexican governments Treasury Secretary began the process to activate the calculation process for the bond, which involves risk modelling firm AIR Worldwide analysing the final data from the USGS on the quake.
As we wrote last week, that final USGS data was due on the 10th October, after which it would be a very quick process to analyse the data and derive whether the parametric trigger had been breached.
Now the payment can be made and Mexico expects the money to be received very quickly, a benefit of a parametric trigger.
The Ministry also explained, “The activation of this instrument and the corresponding payout will be received by FONDEN, which will enable it to channel additional resources to continue the important task of reconstruction and rehabilitation of public infrastructure, education, hospital and highway, as well as housing which suffered damage from the earthquake.”
FONDEN, the Natural Disaster Fund of Mexico, will also use insurance proceeds to help with the reconstruction, with around $265 million expected from coverage it had in place for the recent earthquakes.
Now, the institutional investors ILS and cat bond funds who hold the FONDEN 2017 catastrophe bond Class A notes will see the collateral released to the Mexican government.
78% of the initial investors in the notes were dedicated ILS and cat bond fund specialists (2% were reinsurance firms, 19% asset managers) and with the cat bond having been triggered so soon after issuance it’s likely the notes largely remained with their original holders.
The time to payout for this cat bond has been just under five weeks since the day of the quake, which is relatively fast compared to other historical cat bond defaults and payouts (which we list here).
Mexico now plans to replace the coverage, as we reported, which given recent events could be an interesting test of the catastrophe bond market at this time. At this stage it’s not clear how soon the country could return to the market, but now with two cat bond payouts under its belt (the first being the MultiCat cat bond that was triggered by hurricane Patricia), Mexico has clearly seen the benefits of adding capital markets support behind its disaster risk management strategy.