French reinsurer SCOR has made some structural changes to its latest catastrophe bond issuance, the extreme mortality-linked Atlas IX Capital Limited (Series 2013-1), at the last-minute and has pulled one tranche of notes completely from the issuance while increasing the size of the other.
We can’t be certain but it does appear that investors may not have been as enamoured with the transaction as we originally suspected and this restructure and removal of what was the lower risk, Class A tranche of notes, may be a reaction to a lack of interest in the market.
The Atlas IX Capital mortality cat bond was offering $75m Class A notes with a coupon guidance of just 2.5% return to investors. The Class A notes were the lower risk, triggering at a mortality index value of 104%. This tranche has been pulled completely, despite the bookrunners having lowered the expected coupon to the bottom of the originally marketed range.
The Class B tranche, which is higher risk and triggers at a mortality index value of 102% and as we wrote on Monday were offering a coupon of 3% to 3.25% for the upsized $100m of notes on offer has now been upsized even more. This tranche now offers $150m of notes, we understand, but the coupon guidance has been raised a little to 3.25% to 3.5%.
So the transaction has shrunk to $150m from the $175m of notes which were being marketed at the beginning of this week. We can’t be certain but it does look like investor interest in the lower risk, lower return, Class A notes has not been sufficient to get this tranche to market. For the Class B notes it appears that interest from investors remains but they have forced the coupon up a little.
What we may be seeing here is evidence of investors being unwilling to take on a certain level of risk without a reasonable return that they feel is commensurate with that risk.
For the sponsoring reinsurer SCOR, we’re sure that it will have found that it can secure the retrocessional reinsurance protection for the Class A tranche more cost effectively in another form, perhaps traditional reinsurance or even collateralized cover from another structure. In fact SCOR will almost certainly have had other options available when the deal was launched as it does like to test the appetite of the capital markets.
It will be interesting to see where this mortality catastrophe bond completes. There is now a good chance that the coupon will end up at the higher end of the range, we suspect, if investors are really pushing for a better return for taking on this risk for the sponsor.
We understand the timing on the deal has been pushed back by a few days and final pricing is expected at the end of the week with completion due next week.
We’ll update you as more details become available and the Atlas IX Capital Limited (Series 2013-1) completes. You can read all about this mortality cat bond in our catastrophe bond and ILS Deal Directory.