The Ajax Re Ltd catastrophe bond from Aspen Insurance is looking like it is going to default in the coming days due to it’s inability to pay an upcoming interest payment. Ajax Re is one of the bonds which used Lehman Brothers as a total-return swap counterparty and has since been watched closely after Lehman Brothers collapsed. It will be the second Lehman linked bond to miss an interest payment in a matter of weeks, as recently Allstate’s Willow Re failed to meet it’s interest payment due date. Standard & Poor’s has placed Ajax Re’s Class A notes on creditwatch negative as it awaits the likely default. The interest payment is due on 16th March, a default will be triggered five days after the interest due date if payment isn’t made. The notes had previously been downgraded to ‘CC’ by S&P.
The issue with this particular deal is due to a gap that has appeared between the interest rates on the notes and the assets in the transactions collateral account. The notes are based on 3 month U.S. dollar libor while the investments in the collateral account are based on 1 month U.S. dollar libor. The mismatch between the two has resulted in a shortfall as the assets are not generating enough capital to actually pay the interest. So, it sounds like it’s not strictly the fault of the Lehman default in this case, rather it’s linked to fluctuations in pricing of the assets in the collateral account. A point that makes it even more noteworthy that the recent cat bond deals completed in 2009 are utilising different kinds of assets (such as US-government-backed debt obligations as the underlying securities) to typical catastrophe linked deals. Perhaps that’s a good sign of progress and maturation in the marketplace as issuers seek to reassure investors by striving to improve the way deals are structured as they bring them market.
Ajax Re is a $100m catastrophe bond transaction which provides reinsurance protection to Aspen Insurance from California earthquakes. As ever, you can read more on Ajax Re and most other cat bond deals in the Artemis Deal Directory.