It is now official, investors in the $100m tranche of MultiCat Mexico Ltd. (Series 2012-1) Class C catastrophe bond notes are facing a 50% loss of principal after calculation agent AIR Worldwide delivered its final report on the matter.
AIR had to wait for the National Hurricane Center (NHC) to release its final tropical cyclone report on hurricane Patricia, including the best track data and revised central pressure estimates.
That NHC report was finally released last Thursday and suggested the 50% loss of principal to the notes was almost a certainty. The release of the final calculation agent report confirms that.
Details of the MultiCat Mexico cat bond Class C note trigger can be found in an earlier article here, but essentially the NHC’s determination that the pressure at landfall was 932mb and the pressure at the previous point on hurricane Patricia’s best track was 878mb.
The distance between these two points is quite considerable and according to the terms of the catastrophe bond AIR will have made a linear interpolation of the pressure changes between the two. According to one of our sources who did their own linear interpolation this results in a minimum central pressure of around 923mb at the point Patricia entered the Class C parametric box, resulting in a 50% loss.
Sources said this morning that AIR’s calculation agent report says that an event payment of $50m is due on the $100m tranche of MultiCat Mexico 2012 Class C notes, resulting in the tranche now having outstanding principal of $50m.
There remains a number of reasons why the MultiCat trigger design and the process for determining whether investors faced a loss has been unsatisfactory. Not least of these is the time it took for the determination to be made, being around three and a half months in total.
Apparently there was a time limit on this and that time period was not far off its end point, after which the original reported NHC data from hurricane Patricia at the time of landfall would have been the fall back. That data made the 100% loss look much more likely, hence the time it took for the tropical cyclone report to be released could have been a factor.
That leaves too much to chance and raises questions around what should have been a transparent and rapidly settling trigger, as parametric triggers are supposed to be.
Other factors that raise questions include the uncertainty bounds in the NHC’s landfall pressure figure of 932mb, as we wrote about in more detail here and the fact that pressure recordings made by storm chasers on the scene at the time of Patricia’s landfall have been considered, but there is no way of finding out how much influence they had on the best track data.
The storm chasers data may indeed have been significant, as the recording made was much higher than the NHC’s observations at the time hurricane Patricia struck suggested. Consider for a moment what might have happened if the determination had resulted in a linear interpolation of the pressure and the point at which the hurricane entered the box had been at 920mb.
That would likely have resulted in legal action, as investors would have questioned the many uncertainties in the figures released by the NHC. That would not have been good for the catastrophe bond market.
The lesson is that catastrophe bond parametric triggers need certainty, for both sponsors and investors, meaning they need to be transparent and they need to settle rapidly with as little chance of dispute as possible. This one didn’t have those traits, likely due to it being a fairly old design.
If Mexico comes back to the catastrophe bond market it is to be hoped that a better trigger design is used, perhaps even real pressure or wind speed recordings.
So the market faces a $50m loss and the Mexican government will receive a $50m insurance payout in due course. It is at least encouraging that the cat bond did trigger, as Patricia was a very major hurricane although the loss it caused was not as significant as it could have been due to the landfall location.
At least investors can put this one to bed and move on to managing their portfolios without a potentially stricken asset remaining in them, as now MultiCat Mexico 2012 can mature and become a piece of cat bond market history.
Also read all our coverage of hurricane Patricia and the MultiCat cat bond (most recent first):