The New York Metropolitan Transportation Authority’s (MTA) new MetroCat Re Ltd. (Series 2020-1) catastrophe bond has now been priced, but at the top-end of the revised guidance after investors sought a higher return for the risk, with the deal also sticking at $100 million in size.
As we explained yesterday, the price guidance for this MetroCat Re 2020-1 catastrophe bond was increased after investor’s fed back that the initial coupon was not sufficient.
This new parametric catastrophe bond from the New York MTA was launched just more than a fortnight ago, with the transportation authority seeking at least a $100 million renewal of its soon to mature MetroCat Re Ltd. (Series 2017-1) cat bond.
We understand from sources that the 2020 parametric cat bond from the New York MTA has remained at $100 million in size, so will only partially replace the soon to mature 2017 deal that was $125 million in size.
Our sources in the investor community said that part of the issue was a switch from an RMS model for the 2017 cat bond to an AIR model for 2020.
With the two models outputting very different risk metrics and probabilities for the same perils, particularly on a parametric trigger basis, we’re told investors had some challenges comparing the two and this led to the desire for an increase in coupon.
The new MetroCat Re 2020 catastrophe bond has an initial expected loss of 0.888% and had been offered to investors at first with a coupon in the range of 4.5% to 5%.
The MetroCat Re 2017-1 cat bond had an initial expected loss of 2.25%, using an RMS model, and eventually paid investors a coupon of 3.7%.
So, as you can see, the differences are hard to compare and as a result it was more difficult for investors to put their support behind the new cat bond deal it seems.
As we reported yesterday, the price guidance was elevated in reaction to the investors response to the deal, with the guidance range lifted to 5% to 5.5%.
Now, our sources tell us that the $100 million of Series 2020-1 catastrophe bond notes being issued by MetroCat Re have now been priced at the top-end of that guidance, at 5.5%.
It’s a roughly 16% increase in pricing from the mid-point of the initial guidance range to the new coupon of 5.5%, now offering investors a multiple at market of almost 6.2 times the expected loss.
It seems a hefty multiple, but model differences do matter here (especially with parametric trigger structures) and investors we spoke with claimed this is warranted and not purely a reflection of the higher pricing seen in the cat bond market of late, although clearly this is also a factor here and the cat bond market has firmed in 2020.
So the New York MTA will get a $100 million slice of collateralised reinsurance protection against named storm related storm surge risks impacting the New York area with its latest catastrophe bond.
The $100 million of capital secured through the sale of the notes will collateralise underlying reinsurance agreements between the issuing vehicle and the New York MTA’s captive insurer First Mutual Transportation Assurance Co., which will in turn provide the insurance protection to the MTA.
The coverage will be for storm surges resulting from named storms striking the New York area and also earthquake risks within the New York metropolitan area, across a three-year term, with the reinsurance agreements and ultimately the natural disaster insurance coverage provided to the New York MTA on a binary parametric trigger and per-occurrence basis.