The Gator Re Ltd. catastrophe bond notes have been marked down on the secondary market on a number of broker pricing sheets in recent days, as the expectation that the stricken cat bond will cause investor losses became apparent.
Artemis recently broke the news that the latest loss report for the Gator Re cat bond showed an impact of over $195 million at the end of November, while the attachment point for the bond is just $175 million.
That means investors in the $200 million of Gator Re cat bond notes are facing a loss of around $20 million, a figure that could rise further as an update to the qualifying loss figure is expected covering any December events, as well as any further degradation of loss estimates from earlier in the year.
In fact, the sponsor American Strategic then filed an extension notice which stated that $35 million of Gator Re collateral would be withheld after the maturity date, in order to cover potential further loss creep.
As you’d expect, the knowledge that a loss is due on the notes affects their value in the secondary market, and this has been reflected in the pricing indications that the market works off.
Broker pricing sheets seen by Artemis show a range of secondary market bid prices for the Gator Re cat bond notes, ranging from as low as 65 to as high as 95, showing that not all cat bond broking desks have fully factored in the impending loss by the time sheets were published last week.
A $20 million loss, which is where the attachment figure currently stands, on a $200 million cat bond would suggest just a 10% impact and so perhaps a price around 90, but the majority of pricing sheets have bid indications below that.
This suggests, and the very low bid indications around 65 perhaps confirm, that the expectation in the market is that Gator Re loss estimates will continue to worsen at the next update. However the loss is now capped at $35 million, due to the extension notice we believe, so the lower prices could come up some at the next pricing sheet issuance.
During the extension event the losses suffered under the Gator Re cat bond will be firmed up, any further losses from December added, and reported back to investors so that they know exactly what size loss of principal they will face.
Currently it is believed that no further events will qualify from December, meaning that it is re-surveys of catastrophes earlier this year that could take the loss deeper into the $35 million of collateral that has effectively been reserved for losses by the sponsor.
So far no trading of the Gator Re cat bond notes has been recorded by FINRA’s Trace system. This is not surprising as with the loss seemingly confirmed at $20 million minimum, there seems little for speculative investors to benefit from by buying Gator Re now.