Flagstone Re’s Japan earthquake stricken catastrophe bond, Montana Re Ltd., was confirmed as activated and now on risk for subsequent events ten days ago. At the time no report had emerged to identify the impact to the catastrophe bond notes ratings. Now Standard & Poor’s have announced that the notes have indeed been downgraded as a result of the activation.
The 11th March earthquake in Japan qualified as an activation event under the terms of the transaction when calculation agent Risk Management Solutions determined that the earthquake was indeed a covered event. As a second and subsequent event cat bond, Montana Re is now on risk for the remainder of the current risk period (which ends on the 31st December 2011), meaning that any further covered events before that date could result in a loss to noteholders.
Standard & Poor’s have downgraded Montana Re Ltd’s Series 2010-1 Class E notes from ‘B-‘ to ‘CCC’. Should no further covered events occur during the remainder of the year the notes will revert back to providing coverage from second and subsequent events on an annual aggregate basis. At that time, S&P says that the probability of attachment will be reset to no greater than 6.06% and they will likely upgrade the rating on the notes to ‘B-‘ again.
As with our earlier article on Vita Capital IV, the downgrade won’t come as a surprise to the market or to investors who have been expecting this rating action. If anything it is positive for the market to finally be able to put the impact of the Japan quake on exposed cat bonds behind them and begin to look forward once again.