Swiss Re Insurance-Linked Fund Management

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Platinum’s Topiary Capital catastrophe bond on CreditWatch negative following Japan quake


The outcome for the catastrophe bonds exposed to the Japanese earthquake event is becoming clearer. Of the deals exposed, the first to have its ratings put on watch for a downgrade is Topiary Capital Ltd., a $200m second-event U.S. hurricane, earthquake, Euro windstorm and most importantly Japanese quake bond issued on behalf of Platinum Underwriters in 2008.

Standard & Poor’s announced yesterday that they were putting the ratings of Topiary Capital Ltd.’s Series 2008-1 notes on CreditWatch negative as they wait for the outcome to this transaction to become clearer.

The Credit Watch placement follows the submission of an activation notice to Risk Management Solutions, the calculation agent for the transaction, by the issuer. This means the issuer wants RMS to determine whether the events in Japan on the 11th March count as a qualifying event for the transaction.

Topiary Capital is structured so that only second and subsequent events can actually cause the investors holding the notes to lose their principal and interest. As such, if the Japanese earthquake is deemed a qualifying event the notes will then be at risk of loss should any other qualifying events occur between now and the end of its term which is at the end of July this year.

S&P had previously said that if an event activated the deal (so a first event qualified) they would downgrade the rating to ‘CCC’, however as there are only 4 months remaining on the transaction they may not downgrade it so far as that. S&P said they will take appropriate action as information is received from RMS.

Topiary Capital utilises data from the Japanese National Research Institute for Earth Science and Disaster Prevention who operate the K-Net network of earthquake monitoring stations, so we assume K-Net data is used for this transaction. We wrote yesterday, concerns have emerged about the data from K-Net, although they hoped to have that rectified very soon. This data is used to create a parametric index by RMS against which the events are measured to see if they qualify.

So Topiary Capital is the first catastrophe bond deal which could suffer as a result of the Japanese earthquake. Although investors won’t experience a loss from this event, the deal could get downgraded which will encourage many investors to sell due to the higher risk of loss over the remaining term.

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