The innovative Sierra Ltd. (Series 2019-1) catastrophe bond deal, that seeks parametric U.S. earthquake protection for an investment manager’s portfolio of mortgage related assets, has a new upsized target, now aiming to secure up to 50% more, or $225 million, of coverage for the sponsor.
The Sierra Ltd. catastrophe bond was launched in November and saw a first for the market, in that the sponsor of the transaction and beneficiary of the protection will be a major asset holder of U.S. mortgage securities, an investment fund under the management of Bayview Asset Management, LLC.
It’s the first catastrophe bond we’ve listed in our Deal Directory with this specific use-case since we began tracking this market in 1996.
It marks another step forward for the cat bond market, in providing catastrophe insurance and risk transfer related protection to a new class of sponsor, offering a niche but potentially important example of how the insurance-linked securities (ILS) market can help an investor reduce the natural catastrophe exposure embedded in its investment portfolio.
Sierra Ltd., a Bermuda domiciled issuance vehicle, will issue two tranches of Series 2019-1 notes, with both exposed to U.S. earthquake risks on a parametric trigger basis.
The notes will be sold to investors and the resulting proceeds used to collateralise underlying risk transfer agreements with insurance or reinsurance capital, for Bayview managed GSE mortgage securities focused investment fund, the Bayview MSR Opportunity Master Fund, LP.
As a result, the cat bond will provide Bayview with a source of earthquake risk transfer and insurance, across the U.S. states of California, Oregon, South Carolina and Washington, on a per-occurrence basis using a parametric trigger taking USGS data as its input.
When this transaction was launched it was seeking to secure just $150 million of insurance or reinsurance capital covering parametric earthquake risks for the Bayview mortgage fund.
Now, we’re told the transaction has lifted its targets by up to 50%, with the issuance now hoping to between $185 million and $225 million of capacity for the sponsor.
The Class A tranche of notes, the lower risk layer, had launched aiming for $100 million of coverage, with the notes set to have an expected loss of 0.79% and they were offered to cat bond investors with coupon guidance in a range from 3.25% to 3.75%.
Now, we’re told the Class A tranche is aiming for an upsized issuance of between $125 million and $150 million and the pricing has now been fixed at the lowest end of guidance, at 3.25%.
The Class B tranche of notes, which is the riskier of the two, was launched with a target size of $50 million of coverage, with the notes having an expected loss of 2.71% and a coupon guidance range of 5.5% to 6.25%.
The Class B tranche now has an updated target size of between $60 million and $75 million of coverage, our sources said, with the price guidance now tightened towards the lower-end of the range at 5.5% to 5.85%.
From the potential upsizing and lower/tighter pricing indications, it appears this catastrophe bond has proved popular with the ILS fund and cat bond investor community.
That’s encouraging for the market, as this is a prime example of a buyer leveraging the cat bond market to secure insurance related risk transfer from the capital markets, for a risk that may have been harder to cover effectively in the traditional insurance and reinsurance marketplace.
It shows the cat bond market’s appetite to provide direct, corporate style catastrophe risk transfer and its ability to mobilise large amounts of capacity to meet protection buyers needs.
This landmark transaction could open up a whole range of use-cases for catastrophe bonds and parametric triggers to help asset owners, or large corporations with significant physical and also people related assets, to carve catastrophe, natural disaster and even severe weather risks out of their business, transferring them to efficient insurance and reinsurance related capacity from the capital market.
This Sierra Ltd. (Series 2019-1) catastrophe bond transaction is slated for issuance in January and you can read all about it in the Artemis Deal Directory. We’ll update you as any further information comes to light.