Swiss Re Insurance-Linked Fund Management

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S&P downgrades MultiCat cat bond notes on default expectation


S&P has downgraded the rating of the $100m Class C tranche of the MultiCat Mexico Ltd. (Series 2012-1) catastrophe bond, on the expectation that unless there is a significant change to the reported minimum central pressure figures for hurricane Patricia, “a default appears to be inevitable.”

Ratings agency Standard & Poor’s placed the Class C tranche of the MultiCat cat bond on CreditWatch with negative implications last week on the 28th October, but now the notes have been downgraded from their ‘B-(sf)’ rating to ‘CCC-(sf)’ as an event notice has been filed.

S&P explains that sponsoring reinsurance firm Swiss Re submitted an event notice to calculation agent AIR Worldwide, requesting AIR generate an event report for hurricane Patricia’s potential impact to the MultiCat cat bond notes.

The rating agency believe that a default appears to be inevitable within six months for the MultiCat Class C notes, unless there is a significant change in the reported minimum central pressure when the National Hurricane Center releases its finalised best track data.

Before AIR can complete the event report it needs the necessary data from the NHC to be available, being contracted to supply the report within 15 days of that being available, or 120 days to pass since hurricane Patricia’s landfall.

So that needs the National Hurricane Center (NHC) to release its tropical cyclone report containing “all the information necessary to determine if Hurricane Patricia is a covered event,” which really means the finalised best track and related pressure data.

S&P notes that this us unlikely to be immediate, as experience shows from Odile; “Last year, Hurricane Odile made landfall on Sept. 15, 2014 and the NHC published its report on Dec. 19, 2014. We expect similar timings for the tropical cyclone report for Hurricane Patricia.”

S&P also notes that the MultiCat Mexico 2012 catastrophe bond is due to mature very soon, on December 4th 2015.

That means they are likely to have their maturity extended by sponsoring reinsurance firm Swiss Re, in order to allow the calculation event report to be completed and published by AIR Worldwide.

When an extension occurs, the interest coupon typically steps down to a lower level and in the case of the MultiCat Class C notes this will be from 7.5% down to an extension spread of 3%. That enables investors to continue collecting a smaller coupon, despite the notes being at risk of loss and past maturity at that stage.

If no event report is received by S&P before the notes’ maturity gets extended, the rating agency said it will likely downgrade the rating on the class C notes to ‘D (sf)’ just after December 4th.

To remind you, for the notes to face a default or loss it must be deemed that the central pressure dropped to equal to or below 932mb when it was within the covered area. That would result in a 50% loss of principal, but a central pressure of 920mb or below would be a 100% loss of principal.

Just how much the default will turn out to be remains highly uncertain. The NHC did report a 920mb reading within the covered area, or the parametric box, but that is subject to revision as we saw with Odile.

As we wrote the other day, a stormchaser recorded much higher pressure readings just inland of where Patricia struck, so the question then becomes whether hurricane Patricia’s pressure rose rapidly at landfall and just what the pressure was when it entered the covered area.

The calculation agent AIR will determine that based on the NHC tropical cyclone report data. Until that is published it’s impossible to say whether the likelihood is a 50% or full 100% default.

Read our coverage of hurricane Patricia and the MultiCat catastrophe bond:

Pressure recordings show uncertainty in MultiCat cat bond loss.

S&P put MultiCat Mexico Class C notes on negative watch post-Patricia.

MultiCat Mexico cat bond facing hurricane Patricia loss, but how much?

Cat bond market pricing MultiCat Class C for potential loss.

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