Jamaica’s first catastrophe bond delayed by Covid-19 uncertainty

Jamaica’s catastrophe bond ambitions have been forcibly delayed by the Covid-19 pandemic, as the financial market volatility caused by the coronavirus outbreak has put the Caribbean island nations first cat bond issuance on-hold, according to the country’s finance minister.

Speaking on Wednesday April 29th, Jamaica’s Minister of Finance and the Public Service, Dr. the Hon. Nigel Clarke explained that the ambitions of Jamaica to have an expanded source of disaster risk insurance in-place in time for the 2020 hurricane season may well have been scuppered.

Discussing the significant progress that Jamaica has made in recent years as it strengthened its climate risk and disaster risk financing provisions, Dr. Clarke explained, “Jamaica has been tackling the climate finance risk from various angles and one of the approaches that we’ve been taking has been to steadily build layers of contingent risk financing that would provide resources to meet the emergency costs of natural disasters.

“These components have included a natural disaster fund, credit contingent instruments, parametric catastrophe insurance and a catastrophe bond.

“We are particularly motivated as it has been through a decade of long, hard, arduous national effort that we’ve been able to reduce our national debt from 145% of GDP to 90% of GDP in March 2020, right at the breakout of this pandemic.

“So we have first hand experience of how un-financed exposure to natural disaster can reverse those gains.”

The emergence of a global pandemic crisis has resulted in significant volatility and uncertainty, but it’s vital that it does not derail the work of countries as they look to better protect themselves against climate and catastrophe risks, Clarke said.

“There is a conundrum that is obvious. One part of the conundrum is that this will be a challenging time for the climate agenda, as it competes with a threat that seems far more urgent and one that is likely to retard capability and undermine resolve for tackling climate financing issues.

“The other part of the conundrum is that this is precisely the time that we need to ensure climate adaptation financing and resilience remains at the forefront, because those risks are not going away.

“The pandemic simply raise the stakes and the stakes are being raised at the same time that capabilities are being undermined,” he explained.

Moving on to discuss Jamaica’s first catastrophe bond issuance, which has been a work-in-progress for some years now, as we’ve documented regularly, Clarke said that everything was in place until the pandemic came along.

“For the cat bond we were successful in gaining the support of the UK and Germany through the Green Climate Fund and the United States through USAID, to assist Jamaica with the premium for the placement of our first catastrophe bond prior to the start of the 2020 hurricane season with the World Bank acting as our advisor and placement agent.

“Needless to say, none of us on this call would be surprised that the cat bond markets, we’ve been advised, are frozen to new issuances during this pandemic as risk aversion increases amidst the uncertainty.”

Of course, the freezing up of activity in the catastrophe bond market actually only lasted a few weeks at most and activity has already bounced back to a degree.

But with this second-quarter seeing such as significant amount of maturities and many cat bond issues expected, some will have been put on-hold.

Not to mention the fact cat bond spreads and investor return expectations have clearly risen in recent weeks, making cat bond issues more expensive as well.

As a result, it’s likely that Jamaica has been advised that waiting out the current period of uncertainty will result in better cat bond execution for its first transaction.

But the finance minister is concerned of the inability of the market to serve its risk transfer needs at what seems a critical time for Jamaica.

“So at this time of the greatest economic crisis since the Great Depression, we are going to face the 2020 hurricane season without the deeper disaster risk financial protection we sought at the very time when we actually need it.

“Because to have a pandemic risk and an un-financed natural disaster risk at the same time, just is an unfortunate position to be in,” Clarke said.

Adding that, “The pandemic, if nothing else, highlights the importance of addressing how to build resilience and minimise vulnerability.”

It’s certain Jamaica’s first catastrophe bond will come to market at some point in the future, hopefully not too long.

But getting this transaction out and settled in advance of the 2020 hurricane season may now be a challenge, not to mention the pricing challenge of higher premiums needing to be paid.

So it could be that the Jamaica catastrophe bond is held over until later this year, or at least until market conditions look more hopeful for an effective execution of the deal and sale of the cat bond notes to investors. We’ll update you should we hear anything further.