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Nelson Re arbitration withdrawn, notes upgraded, principal to be repaid in full


Very interesting news this morning on the Nelson Re Ltd. catastrophe bond, whose fate has been uncertain for well over a year now due to an arbitration claims over whether the Class G tranche of cat bond notes issued by Nelson Re back in 2008 faced a loss of principal or not, ultimately due to losses from hurricane Ike. Now, sponsor Glacier Re has elected not to pursue the case and the arbitration claim has been withdrawn leaving investors clear to collect on the notes principal.

The Nelson Re story has been a messy one, involving a disagreement between the sponsor Glacier Re and others including the administrator of the SPV over whether a loss payment was due under the terms of the notes and the cat bonds underlying reinsurance contracts.

As we said back in January 2012, the arbitration claim boiled down to Glacier Re’s opinion of how they should validate the size of loss and any claims under the terms of the Nelson Re cat bond versus the investors opinions.

Now, and we’re unsure for what exact reason but possibly as it found it couldn’t win an arbitration claim, Glacier Re has withdrawn the arbitration claims and the arbitration tribunal approved the petition to withdraw it. As a result of this the principal is now due to be repaid in full to the cat bonds investors on 6th March 2013, without any reduction for catastrophe losses.

The repayment in full brings up another interesting angle, Nelson Re is the last remaining cat bond which uses a total return swap as collateral protection. Rating agency Moody’s notes that the repayment in full could only be made assuming the asset swap counterparty can deliver par against the collateral assets.

However, the asset swap counterparty is Goldman Sachs International in this case and the update from Moody’s says that the collateral assets are invested in a single CLO (collateralised loan obligation) security which matures in 2016. Apparently Goldman Sachs International has agreed to deliver par against the sale of the collateral assets, so that should ensure investors receive their payments in full.

Moody’s has upgraded the $67.5m of Class G notes from Ca(sf) to A3(sf) as a result of this news.

The investors in the Nelson Re cat bond will have cause to celebrate on this news. Most had likely written off the investment for the moment and were at the least expecting a reduction in principal on completion of the arbitration, which was over $20m. There may also be some speculative investors who took a chance and bought into Nelson Re at reduced pricing while its future was so uncertain, they will be especially pleased with their profit on receiving the principal back.

So it looks like we can close the chapter on one of the only cat bonds to come under a long-running dispute over payout. Given that we have over 270 such deals listed in our Deal Directory it’s testament to the markets professionalism that we’ve only seen such a dispute occur the once in the markets history. Also noteworthy is the fact that once Nelson Re pays out and is matured the total return swap will no longer be a feature of the catastrophe bond market.

Here’s a handy timeline of the history of the Nelson Re Ltd. saga:

15th July 2011: Glacier Re submit the proof of loss which shows Nelson Re investors to be liable for nearly $27m of claims. The proof of loss goes off to be verified by the deals administrator.

15th August 2011: Deloitte & Touche issues a letter saying they are waiting for further information from Glacier Re so that they can re-calculate the ultimate net loss and what would be payable by investors.

25th August 2011: Deloitte & Touche issue another letter saying that they are unable to calculate the loss as they are, and we quote from Moody’s report: “Awaiting resolution between Nelson Re and Glacier Re on whether certain underlying policies that incepted in 2008 prior to June 7, 2008, and which were not initial modeled contracts, are covered under the reinsurance agreement.”

26th August 2011: Deloitte & Touche issued another letter saying that they couldn’t complete the calculations and hence could not validate Glacier Re’s request for reduced interest payments.

29th August 2011: Glacier Re extend the agreement with Nelson Re for another three months until 6th December. We assume this is so they can continue to try to validate their proof of loss.

January 2012: Glacier Re takes Nelson Re Ltd. to arbitration seeking a $20m settlement.

May 2012: Nelson Re gets extended once again as arbitration makes no progress.

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