Price guidance for the New York Metropolitan Transportation Authority’s (MTA) new catastrophe bond has been increased after investor’s fed back that the initial coupon was not sufficient, we’re told, with the parametric MetroCat Re Ltd. (Series 2020-1) cat bond transaction now offering a higher return.
This new parametric catastrophe bond from the New York MTA was launched a fortnight ago, with the transportation authority seeking at least a $100 million renewal of its soon to mature MetroCat Re Ltd. (Series 2017-1) cat bond.
The currently $100 million single tranche of Series 2020-1 Class A notes are being offered to investors and the proceeds of the sale will be used to collateralise underlying reinsurance agreements between the issuing vehicle and the New York MTA’s captive insurer First Mutual Transportation Assurance Co., which will in turn provide the insurance protection to the MTA.
The coverage will be for storm surges resulting from named storms striking the New York area and also earthquake risks within the New York metropolitan area, across a three-year term, with the reinsurance agreements and ultimately the natural disaster insurance coverage provided to the New York MTA on a binary parametric trigger and per-occurrence basis.
At launch, the transactions single tranche of notes, which have an initial expected loss of 0.888% were offered to cat bond funds and investors with coupon price guidance in a range from 4.5% to 5%.
It’s worth noting here that the 2017 MetroCat Re catastrophe bond was modelled using RMS, where as this 2020 renewal is with an AIR model.
The two models can output very different risk metrics for the same deal and layer, especially when it comes to a parametric trigger. The 2017 MetroCat Re deal had an initial expected loss of 2.25%.
It’s understood from investor sources that the reduction seen in the expected loss with the switch to an AIR model did not warrant a lower coupon, in their view.
Hence, investors fed back on this and after a reassessment of the coupon on offer the MetroCat Re 2020-1 cat bond notes are now being offered to investors with a higher coupon in a range from 5% to 5.5%.
Of course, the majority of recent catastrophe bonds have also seen an uptick in pricing, often pricing towards the upper-end of guidance, as investors in the insurance-linked securities (ILS) market are currently demanding higher returns from their allocations to cat bonds.
So, as well as the investor feedback related to the differences between model vendor outputs, the shift upwards in coupon guidance is also likely a function of the cat bond market at this time.