Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Oil Casualty Insurance Ltd. wants to buy back Avalon Re notes


Avalon Re is fast becoming the catastrophe bond that just doesn’t go away. The $400m cat bond was issued by Oil Casualty Insurance Ltd. (OCIL) back in 2005. Due to have matured in June 2008, Avalon Re was first downgraded and then had its maturity date extended a number of times while losses with the potential to impact it continued to develop. Now it’s back on the agenda again as OCIL are seeking to repurchase some of the notes from the deal.

This isn’t something we’ve come across before in the world of insurance linked securities and cat bonds. Notes from other instruments are often repurchased but we’ve not heard of this happening in the world of cat bonds to date (correct us in the comments if we’re wrong please!).

OCIL are offering to buy back certain notes from the Class B tranche of the transaction. They’re offering to spend up to $42.5m to repurchase $50m of the outstanding $135m of Class B notes using a Dutch auction. Essentially this means that as an investor you now have the option to recoup up to $850 for every $1000 you invested. The offer to repurchase stands until 11.59pm ET on the 2nd September 2009. The offer is greater than prices currently available on these notes in the secondary market which is bound to be making it a tempting prospect for anyone invested in the deal and unsure of the prospects of that investment.

The last time we wrote about Avalon Re we mentioned that the Class C notes were already likely to incur losses and it was the Class B that were now thought to be at risk. We’re not sure of the reason for this buy back from OCIL, it could be that the losses are lower than expected and they can see a benefit in owning the notes themselves? Or it could be that the notes are going to default and OCIL sees it as simpler to sort out those losses from their own reserves and reinsurance facilities (rather than upsetting investors). Whatever the reasons behind this move, it’s interesting as it shows that notes are not destined to stay in the hands of investors even with losses on the horizon. We’d really like to hear your views on this! It will be interesting to see if a rating action follows this in the next couple of days as the rating agencies get to grips with this announcement.

Read the full details on the Dutch auction in this release from OCIL.

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