More details on the Kyrgyz Republic & Tajikistan catastrophe bonds from the ADB

The Asian Development Bank (ADB) has its first catastrophe bond offerings in the market, with two $75 million issuances that each target parametric earthquake and extreme precipitation disaster risk financing from the capital markets for the Kyrgyz Republic and Tajikistan.

We revealed on Friday that the first catastrophe bonds to be offered by and set to be issued directly by the Asian Development Bank (ADB) are now in the market.

As promised, we are now following up with more details on the structure of these first cat bonds from the Asian Development Bank, with details on their parametric triggers, the risk modelling and calculation agents, the risk metrics and price guidance for the two offerings of cat bond notes.

We’ve listed these first Asian Development Bank catastrophe bonds as Asian Development Bank – Kyrgyz Republic 2026 and Asian Development Bank – Tajikistan 2026 within our extensive cat bond Deal Directory.

Both of the catastrophe bonds, one for each of the Kyrgyz Republic and Tajikistan, are being issued using the ADB’s Global Medium-Term Note Program, as Capital at Risk notes.

They make up a component of the disaster risk financing under an ADB project named the Risk-Layered Disaster Relief Finance Program, which will consist of two funding structures.

First, Contingent Disaster Financing (CDF), which is designed to provide budgetary support in the event of medium-severity natural hazards and health emergencies, and parametric catastrophe bonds targeted to protect against more significant events that could exhaust the financial response capacity of each country, which the ADB terms a Disaster Relief Bond (DRB).

In a similar vein to the World Bank cat bond issues, the Asian Development Bank is using its own treasury facilities to issue these catastrophe-linked securities, or capital-at-risk notes, to investors.

The transactions are extremely similar, in terms of the risk transfer they seek for each of the countries, their structure, the modelling and parametric triggers used, and the funding sources for the risk premiums that will need to be paid to secure the protection from the capital markets.

As we said in our article last Friday, global reinsurance firm Munich Re is the sole structuring agent, while broker capital markets unit Aon Securities is the sole bookrunner for both of the ADB cat bond issuances.

Both the offerings of Kyrgyz Republic Disaster Relief Capital-At-Risk-Notes and of Tajikistan Disaster Relief Capital-At-Risk-Notes are seeking $75 million of risk transfer protection for each country.

The notes will be offered and sold to investors, with the proceeds from their sale set to effectively act as the collateral to the risk transfer. But, like some World Bank issues, the proceeds from the sale of the capital-at-risk notes will be utilised by the ADB in its operations, while the risk transfer agreements between the ADB and the two countries will mean the ADB is obliged to fund any payouts in an amount equal to any principal reduction under the parametric risk transfer arrangements.

Under the agreement, we understand each of the countries will also be obliged to utilise any payouts received from the ADB under the risk transfer agreement to support vulnerable persons and communities.

Which means that these ADB cat bonds should appeal to investors looking for securities that fit within a responsible or social investment framework as well as to cat bond specialist investors.

Both the Kyrgyz Republic and Tajikistan catastrophe bonds are set to provide each country with a targeted $75 million source of parametric disaster risk transfer to run across a roughly three-year term, until the end of April 2029, we understand.

Each transaction will provide the relevant country with a $75 million source of protection, but this is split through risk transfer sub-limits as a targeted $65 million of parametric earthquake protection and $10 million of parametric extreme precipitation protection.

The parametric disaster risk transfer protection is structured on a per-occurrence basis across the full three-year term for each covered peril, with these cat bonds designed to payout on the occurrence of extreme and damaging earthquake or precipitation induced disaster events for the covered nations.

On the earthquake side, the parametric trigger is designed with a cat-in-a-box type structure, taking into consideration factors such as location, intensity and depth of earthquake events. Any payouts following an earthquake would be 0%, 25%, 50%, 75% or 100% of the notes’ principal, depending on the severity of an event and the payout rate derived under the parametric trigger arrangement, we are told.

We assume this also means there could be, for example, a 25% payout earthquake event and the remaining 75% of principal would stay on-risk for the rest of the catastrophe bond term for the country, so the quake sub-limit can provide coverage for a number of occurrences in that way.

Notably, the Global Earthquake Model Foundation (Fondazione GEM) has provided the expert risk analysis for the earthquake exposure under each of the ADB cat bonds, the first time any catastrophe bond has been brought to market using one of its models. AIR Worldwide (Verisk) is acting as the calculation agent for earthquake events, sources said. Earthquake event data will be reported by the GFZ, which is a German research centre for geosciences.

It’s also worth noting that with the Kyrgyz Republic and Tajikistan being neighbouring countries, there could be single quake events that affect one or both of the cat bonds and there are boxes in the cat-in-a-box structure that span across borders as well.

On the extreme precipitation side of the limit for each ADB cat bond transaction, the risk is presented as unmodelled, we understand. However, we’re told investors are furnished with a number of scenario type events and an explanation of how historical precipitation related events have unfolded in the covered countries and how they might affect either cat bond.

The extreme precipitation parametric trigger utilises a gridded approach, with daily rainfall amounts adjusted for snow and summed up across as much as a 21 day period to derive an index value and whether any payout is due.

We’re told the extreme precipitation sub-limit can only be tapped once and it also appears that if the parametric index value breaches the trigger it would be paid out in full, so it does not seem there could be a partial payout of the precipitation coverage, just one full payout or none for an event.

Sources said that JBA Risk Management, a catastrophe risk modelling firm with a specialism in flood and precipitation events, is acting as the calculation agent for the extreme precipitation sub-limit parametric triggers. The ECMWF is said to be the reporting agency for extreme precipitation data in the case of each of these ADB cat bonds, using its ERA5 data.

While precipitation is not a typical cat bond peril, it features in many severe storm and related catastrophe bonds and is often a less or even unmodelled component.

Cat bond perils being presented as unmodelled is also not as unusual as you might think, for example consider the meteorite impact and volcanic eruption reinsurance coverage that some US multi-peril deals provide their sponsors.

Now, moving on to the specific risk metrics and price guidance data points for each of these ADB cat bonds.

First, the targeted $75 million of Asian Development Bank – Kyrgyz Republic 2026 catastrophe bond capital-at-risk notes come with an initial attachment probability of 3.883%, an initial expected loss of 2.296% and they are being offered to investors with guidance for a risk margin (or risk interest spread) of between 5.25% and 6%, we understand.

Second, the targeted $75 million of Asian Development Bank – Tajikistan 2026 catastrophe bond capital-at-risk notes will have an initial attachment probability of 3.925%, an initial expected loss of 2.011% and they are also being offered to investors with guidance for a risk margin (or risk interest spread) of between 5.25% and 6%, we have learned.

It’s also worth noting that the premium payments are set to come from so-called Disaster Relief Bond Grants assigned to the project by the Asian Development Bank.

While there are some notable features about these parametric catastrophe bonds, in terms of the regions to be covered, the precipitation peril and the fact it is unmodelled nature, the ADB entering the market as a direct issuer of catastrophe-linked securities and more, it’s perhaps more important to stress that if accepted by the cat bond investor base and successfully issued these could pave the way for other cat bonds for ADB member countries (of which there are many).

It’s great to see the Asian Development Bank looking to broaden the catastrophe bond market’s horizons in this way and we hope the offerings will receive a positive response from fund managers and investors.

You can read all about these first Asian Development Bank catastrophe bonds in our extensive cat bond Deal Directory, listed as Asian Development Bank – Kyrgyz Republic 2026 and Asian Development Bank – Tajikistan 2026.