Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

High-yield cat bonds feature again in last week’s secondary trades


Once again, the last week has seen an increasing focus on higher yielding catastrophe bond notes in the secondary trading market, as investors seek to maximise their returns with any opportunities to buy notes that yield above the average of recent new issuance.

This has been a trend since the start of the year, as Artemis has been reporting each week, with the majority of secondary cat bond trading revolving around notes with a coupon of 6% and higher.

Investors are keen to acquire these notes to hold to maturity as the coupons are, in some cases, significantly higher that many of the recently issued catastrophe bonds where risk levels and as a result yields have often been lower. In fact many of the cat bonds traded have coupons commensurate with collateralized reinsurance deals which is currently where a lot of ILS manager money is flowing to.

The average coupon of new cat bond issuance in 2014 was just 4.56% according to Artemis data, which has left some investors and ILS managers seeking higher yielding opportunities making anything that comes into the secondary market with a higher coupon attractive.

For some other investors, who have held these higher yielding cat bond notes for a while, the fact that maturity is approaching for many of them and as a result secondary prices slowly declining makes selling attractive as well as they can capitalise on above par pricing. Hence the trades are finding counterparties on both sides meaning the secondary cat bond market has seen reasonable activity, even though primary issuance has not yet exactly exploded in 2015.

Once again the majority of cat bonds that traded in the last week, and where trades were captures by FINRA Trace system, were higher yielding. All were above 6%, the majority above 8% and a number were into the double-digits.

The other trends to note are a continued focus on short-dated, soon to mature cat bonds, as longer-dated are more attractive to hold onto, as well as a continued slow decline in pricing across the majority of trades.

Finally, the Gator Re cat bond traded again this week at the same price as a month earlier. The fact that Gator traded flat suggests that investors have not seen an increase in the bonds aggregated losses from 2014, at this stage, so the perception of the risk of any payout from last year’s severe thunderstorms has not risen at this time. The Gator Re catastrophe bond continues to be discounted by just 10% at a price of 90.

Here is a list of the catastrophe bonds that traded last week, where data is available from FINRA’s TRACE system, their most recent prices and where they traded previously:

Atlas Reinsurance VII Limited – Traded at 102.57 on 11th Feb, up slightly from 102.55 on 30th Jan. Coupon 8%. Matures 1st July 2016.

East Lane Re IV Ltd. (Series 2011-1) – Traded at 100.31 on 11th Feb, down from 100.4 on 4th Feb. Coupon 6.665%. Matures 13th March 2015.

Gator Re Ltd. – Traded at 90 on 12th Feb, flat with last trade on 9th Jan. Coupon 6.5%. Matures 9th Jan 2017.

Lakeside Re III Ltd. – Traded at 103.71 on 12th Feb, down from 103.85 on 28th Jan. Coupon 8.03%. Matures 8th Jan 2016.

Long Point Re III Ltd. (Series 2012-1) – Traded at 101.28 on 11th Feb, down from 102.06 on 10th Dec 2014. Coupon 6.03%. Matures 12th Jun 2015.

Mythen Re Ltd. (Series 2012-2) – Class A notes traded at 105.96 on 12th Feb, down from 106.5 on 9th Jan. Coupon 8.557%. Matures 5th Jan 2017. Class B traded at 105.6 on 12th Feb, down from 108.25 on 3rd Oct 2014. Coupon 11.78%. Matures 10th Nov 2016.

Queen Street IV Capital Ltd. – Traded at 100.55 on 11th Feb, up from 100.5 on 4th Feb. Coupon 7.505%. Matures 9th April 2015.

Queen Street V Re Ltd. – Traded at 100.62 on 11th Feb, down from 101.68 on 6th Feb. Coupon 8.505%. Matures 9th April 2015.

Queen Street VI Re Ltd. – Traded at 100.78 on 12th Feb, down from 100.9 on 21st Jan. Coupon 10.383%. Matures 9th April 2015.

Queen Street VII Re Ltd. – Traded at 103.8 on 9th Feb, flat with last trade on 28th August 2014. Coupon 8.633%. Matures 8th April 2016.

Successor X Ltd. (Series 2011-3) – Class V-F4 traded at 101.7 on 11th Feb, no previous trade data. Coupon 16.28%. Matures 10th Nov 2015. Class V-X4 traded at 103.9 on 12th Feb, down from 104.6 on 23rd Sept 2014. Coupon 11.28%. Matures 10th Nov 2015.

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