Successor X V-F4 catastrophe bond notes climb back towards par


Over the last few weeks, secondary market pricing indications from catastrophe bond trading desks show that the hurricane Sandy threatened Successor X Ltd. (Series 2011-3) Class V-F4 cat bond notes are considered by investors to be increasingly less likely to face any losses from the superstorm.

The pricing indications from secondary cat bond trading desks are a reasonable measure of investor sentiment for a specific deal and in the wake of last years hurricane Sandy the Successor X V-F4 notes saw large reductions in the bid levels made on trading desks suggesting that the notes were at risk.

The notes had initially plummeted after Sandy struck the U.S. northeast and the notes saw the largest price drop of any exposed cat bond suggesting that investors felt them to be the most at risk of a loss. The pricing recovered a little in December before dropping again when PCS announced its latest estimate of insurance industry losses to be $18.75 billion.

The $18.75 billion loss figure was thought to be very close to the amount required for investors in the Successor X V-F4 to begin facing losses of investment principle.

Investor sources told us back in February that their own internal modelling showed that an $18.75 billion industry loss would bring the post-event calculation modelling very close to the 226 index value required to trigger the Successor V-F4 cat bond notes.

In recent months PCS has not changed the industry loss estimate, leaving the estimate at $18.75 billion in both its March and May re-surveys. As a result is seems that investor confidence in the Successor X V-F4 has been building and the price indications have recovered somewhat as a result, with bid indications now moving back towards par.

Here’s a look at some of the historical bid indications we recorded for these notes, averaged out from a number of broking desks. The latest re-survey data from PCS was released around the 27th or 28th of May and it’s clear from the table below that it has had an effect on investor confidence in these cat bond notes.

Issuance Bid – 19th Oct Bid – 16th Nov Bid – 31st Dec Bid – 25th Jan Bid – 15th Feb Bid – 31st May Bid – 14th Jun
Successor X Class V-F4 98.01 25.00 75.00 50.00 58.00 76.00 86.00

Trading has always been light in these notes, despite the mark-to-market price drop, showing that investors were not attempting to offload the notes, preferring to wait until the extent of the loss was better understood. Some investors may have marked these notes down in their portfolios after Sandy struck and will now be seeing the benefit of the Successor X V-F4 notes recovery.

Some speculative investors may also have bought these notes at reduced rates when the price really dropped, however this will not have been in any great volume as we understand that trading was restrained.

We spoke to Craig Bonder, Managing Director of the catastrophe bond trading desk at AK Capital, to find out his opinion on how the market had reacted to Sandy with particular reference to Successor X V-F4. He told us; “Successor X V-F4 has had limited trading since Sandy first struck. Although the recent PCS reports have been positive increasing bid interest and levels there is still the possibility of revision preventing bids from returning to pre storm levels.”

So the final fate for these Successor X V-F4 catastrophe bond notes still contains an element of uncertainty, should PCS increase its loss estimate further at the next reporting interval, investors could face losses. However the markets confidence in the notes has been buoyed by the lack of creep in the industry loss estimate in recent weeks suggesting investors have behaved in a restrained and sensible manner when considering options of whether to offload these notes.

Only once the final loss estimate is released by PCS will we know if any losses are faced by the Successor X Ltd. (Series 2011-3) Class V-F4 cat bond notes. If the loss estimate remains the same again we expect these notes will complete their recovery back towards pricing around par.

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