A rarely seen occurrence in the catastrophe bond market, a cat bond transaction designed to protect a corporate sponsor, has begun marketing today with the launch of Pylon II Capital Ltd. The transaction ultimately covers Electricite De France (better known as EDF), one of the largest energy companies in the world and a leader in nuclear power generation, for European windstorm risks in mainland France.
EDF actually utilised the capital markets to secure reinsurance coverage in a 2003 transaction through an SPV called Pylon Re. That transaction was not well publicised at the time but was one of the rare corporate catastrophe bond issuance to hit the market (others being Circle Maihama and Concentric for Tokyo Disneyland and Studio Re for Universal Studios). The fact that they are returning to the cat bond market at this time could signify that it is easier for a corporate to issue a cat bond now than it has been in recent years. Their Pylon Re deal matured in 2008 so there has been a gap since that was issued. However we hear that this Pylon II Capital deal has been in the making since late last year, which is a particularly long lead time, something that needs to shorten if corporate cat bonds are to take off and become a more frequent occurrence.
This transaction is being issued through an Irish special purpose vehicle called Pylon II Capital Ltd. The transaction seeks to secure €150m of European windstorm coverage for mainland France on a per-occurrence basis over the risk period. Covered areas are the whole of France excluding Corsica and any overseas territories. Two tranches are being issued, €65m of Class A notes and €85m of Class B notes. The deal is expected to complete during August and maturity is scheduled for the end of April 2016 making this a long duration deal compared to most cat bonds. That length of the deal must be attractive to EDF as they secure a layer of reinsurance cover for five full European windstorm seasons.
The risk transfer counterparty in the transaction is actually French bank Natixis, an experienced outfit in the insurance-linked securities space. Natixis in turn enter into separate financial contracts with EDF subsidiary Electricite Reseau Distribution France (ERDF). This tends to be the method that corporates access cat bond protection through, by utilising a bank intermediary which can help the transaction go through. Natixis are also arranging this deal.
The transaction will utilise parametric triggers with risk modeller EQECAT acting as calculation and reset agent and data being used from the reporting agent METNEXT’s (a subsidiary of Meteo-France) network of wind speed monitoring stations. EQECAT will calculate an index value following any qualifying events based on the wind speeds measured and on predetermined weights by location.
The notes provide protection above an index value of 777 (for Class A) and 420 (for Class B), up to an index value of 1,050 (class A) and 777 (class B) on a per-occurrence basis. The Class A notes have a useful drop-down feature which is activated if the Class B notes suffer a partial or total loss of principal, the Class A notes attachment and exhaustion points will be lowered to ensure that there is no gap in cover afforded. This also allows the Class A notes to provide cover from the attachment point of 420 should the Class B notes suffer a total loss. Standard & Poor’s note that this could have happened in 1999 with windstorms Lothar and Martin. S&P note that should the Class A notes drop-down they will reassess the Class A notes ratings to reflect the increased probability of attachment.
Proceeds from the sale of the €150m notes will be invested in a global master repurchase agreement (tri-party repo) with Natixis as the counterparty.
S&P have assigned preliminary ratings to both tranches of notes, with the Class A notes being rated ‘B+’ and Class B rated ‘B-‘.
We’ll bring you further details once this deal comes to market. As with other recent cat bonds there is a chance that this could be upsized given the attractiveness of ILS to investors at the moment. Full details will be added to our catastrophe bond Deal Directory.