Two classes of Crystal Credit notes downgraded; default likely

Back in September we reported that Moody’s had placed some classes of the Crystal Credit Ltd. credit reinsurance insurance-linked security on review for possible downgrade. Increasing losses being experienced by the notes led Moody’s to believe a review was necessary and now they’ve completed that review and concluded that the loss experience is bad enough to warrant a downgrade.

The Crystal Credit Ltd. transaction was issued by Swiss Re to provide them with catastrophe bond type credit reinsurance protection through securitisation. We’ve covered this transaction in detail and our previous coverage can be found here.

Moody’s says that losses from underwriting years 2006 and 2007 are now well developed enough to be provisioned for and Moody’s expects those two loss years to be in line with expectations. However losses from 2008 are expected to develop further. Aggregate losses are currently expected to be around €786m for the three years which is above Moody’s original estimates and well above the trigger for the transaction to pay out to Swiss Re. Moody’s says that based on those losses the Class B notes will be impacted and there is a meaningful (over 10%) chance of large potential losses for the Class A notes.

The transaction itself is structured so that Swiss Re will receive a payment from Crystal Credit should losses for the three years exceed €666m. This payment will be drawn from the proceeds of the sale of the notes. With losses well above that figure already it seems Crystal Credit is destined for default.

With losses still increasing from the 2008 underwriting year the actual loss experienced by Crystal Credit could grow and thus the impact to investors. Moody’s has downgraded the Class A notes to  ‘Caa1’ and the Class B notes to ‘C’.