IBRD CAR 118-119

This latest Mexico earthquake catastrophe bond has been issued as part of a multi-country cat bond offering from issuer the World Bank’s International Bank for Reconstruction and Development, featuring five tranches as IBRD CAR’s 116, 117, 118, 119, 120, covering the four Pacific Alliance countries (Chile, Colombia, Mexico, Peru) against earthquake losses on a parametric basis.

This Mexico earthquake cat bond is being issued through the International Bank for Reconstruction and Development (IBRD) global debt facility in two series of notes, while the beneciciary of the parametric insurance coverage is Mexico’s natural disaster fund, FONDEN.

This transaction features complex series of counterparties, with the trustee of FONDEN acting the insured, the Mexican government-owned insurer Agroasemex S.A., which then enters into a reinsurance arrangement with Swiss Re, who act as ceding reinsurance firm, and Swiss Re then enters into retrocessional agreements with the IBRD, with those capitalised by the sale of two tranches of earthquake-linked notes.

The IBRD will issue two series of catastrophe-linked Capital At Risk notes (CAR Series 118 Class A and CAR Series 119 Class B) through its debt issuance facility, which will be sold to qualified investors and insurance-linked securities (ILS) specialists, to provide the reinsurance capital to back the earthquake protection.

The issuance is preliminarily sized at $225 million of coverage for Mexico’s FONDEN, with the CAR Series 118 Class A note offering sized at $140 million and the riskier CAR Series 119 Class B note offering sized at $85 million.

The two tranches of IBRD Mexico earthquake-linked capital-at-risk notes will provide Mexico’s FONDEN with per-occurrence protection across a two year period, with maturity scheduled for February 2020.

The $140m of IBRD Mexico earthquake-linked capital-at-risk Series 118 Class A notes have a modelled attachment probability of 1.09%, a modelled expected loss of 0.79% and are being offered to investors with a risk margin (effective coupon) of between 3% and 3.75%, we understand.

The $85m of IBRD Mexico earthquake-linked capital-at-risk Series 119 Class B notes have a modelled attachment probability of 8.25%, a modelled expected loss of 6.54% and are being offered to investors with a risk margin (effective coupon) of between 9% and 9.75%.

Both tranches of the Mexico earthquake-linked notes can be triggered with two payout amounts, set at 50% or 100% of principal, depending on various parameters associated with an earthquake event, including the magnitude, epicenter location, depth etc.

Update 1:

The IBRD CAR 118-119 issuance for Mexico, which features two series of catastrophe-linked Capital At Risk notes (CAR Series 118 Class A and CAR Series 119 Class B), was launched as a CAR Series 118 Class A tranche sized at $140 million and a riskier CAR Series 119 Class B note offering sized at $85 million.

The CAR 118 Class A notes are now targeting a $160 million to $175 million issuance, while the CAR 119 Class B tranche are now targeting $100 million to $115 million of notes.

Pricing on the CAR 118 series Class A notes launched at 3% to 3.75% but this has now dropped to 2.5% to 3%, while the CAR 119 series Class B notes that launched at 9% to 9.75% have now seen their pricing guidance drop to 8.25% to 9%.

Update 2:

The Series 118 Class A notes priced at $160 million in size and Series 119 Class B $100 million. Both tranches saw their risk margin equivalent coupon fixing at the bottom-end of already reduced guidance, with Series 118 Class A fixed at 2.5% and Series 119 Class B at 8.25%.