Standard & Poor’s have now downgraded all four of the catastrophe bonds which used Lehman Brothers Special Financing as the total return swap counterparty. The issuers of the bonds have terminated their swaps and are exploring their options and the lack of a counterparty is the reason for the following actions.
‘Ajax Re Ltd.’s class A principal-at-risk variable-rate series 1 notes and Carillon Ltd.’s class A-1 principal-at-risk variable-rate notes were lowered to ‘CC’ from ‘BB’, and the CreditWatch placement on these ratings was retained with negative implications. The ratings on Newton Re Ltd.’s class A 2008-1 principal-at-risk variable-rate notes and Willow Re Ltd.’s class B 2007-1 notes were lowered to ‘CCC’ from ‘BB’ and ‘BB+’, respectively, and the CreditWatch implications on these ratings were revised to developing from negative.’
S&P say that they believe it unlikely that Ajax Re or Carillon will be able to find anyone to take on the total return swap while Newton and Willow may be able to or assume the investment risk themselves.
This is a direct result of the current crisis in the economic markets and it is possible that losses may be felt by either cedents or investors. Quite what the reaction of investors such as hedge funds will be is unclear as it must surely be difficult for them to offload their investments in these bonds given the downgrade and lack of confidence in them.
Full details available with a login to S&P’s website here.