Further details have come to light, via the Standard & Poor’s rating announcement, about Hannover Re’s Eurus II cat bond and it’s novel repurchase agreement collateral set up. The deal is being arranged by BNP Paribas and Aon Benfield Securities with AIR Worldwide providing risk modelling services and acting as calculation agent.
The E75m deal is designed to provide cover to Hannover Re against losses from storms in Belgium, Denmark, France, Germany, Ireland, the Netherlands, and the UK from August 2009 to March 2012. Payments will be calculated by AIR Worldwide based on actual windspeed recordings made at weather stations within each covered country. This provides Hannover Re with much needed cover against the type of winter storms which can be extremely damaging as evidenced by windstorm Klaus in January this year. As the cat bond market opens up and becomes easier to access we expect to see more reinsurers using the capital markets to help protect their significant property exposures in Europe.
The repurchase agreement, it transpires, is a novel new approach to the collateral issue and also seeks to address correlation too. The scheme involves three parties, Eurus II (read Hannover Re), BNP Paribas and Euroclear (the clearing house). Eurus II will buy assets from BNP Paribas with the proceeds of the initial sale of the deals notes. This will utilise BNP Paribas’ portfolio of highly rated corporate and sovereign bonds as the collateral asset. The Bank of New York Mellon is acting as custodian for the assets with Euroclear monitoring the value of the assets and ensuring assets used are of a suitable quality.
Eurus II will enter into the repurchase agreement with BNP Paribas who will buy back assets at pre-agreed prices just in time for each interest repayment during the lifetime of the deal. Assets will be over collateralised to further protect against any fluctuation in asset prices. After the interest has been paid Eurus II will again buy more of the collateral assets which should always equal the outstanding principal left. This method should ensure that Eurus II can always make it’s interest payments and also helps ensure that should financial market instability affect the assets Eurus II will be able to get back the pre-agreed price for them. It would then of course have to buy more assets to cover the remaining principal which may not then be worth as much, but that could work either way as the market could then recover increasing the assets value after they were purchased.
It’s still not a perfect model but it is yet another step in the right direction by issuers as they seek to find an alternative to the total-return swap. Read about all of the recent catastrophe bond transactions and how they are attempting to improve their structures in our Deal Directory.