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Original Risk: A Society for Change Agents

Target for Mexico’s FONDEN 2017 cat bond lifted to $360m


The target size of the recently launched IBRD / FONDEN 2017 multi-peril catastrophe bond, which will secure a source of reinsurance risk transfer for Mexico’s Fund for Natural Disasters (El Fondo de Desastres Naturales), has been increased by 24% with the deal now expected to result in issuance of up to $360 million of notes.

The deal launched ten days ago, with a transaction aiming for a $290 million cat bond issuance to benefit Mexico’s FONDEN. The transaction is being issued with the assistance of the World Bank Group’s multilateral development bank, the International Bank for Reconstruction and Development (IBRD) with three tranches of catastrophe-linked Capital At Risk notes targeted.

We’re now told that all three tranches of notes are set to increase in size, while the pricing guidance for each of them has fallen to below the initially marketed range reflecting the demand seen from cat bond investors.

This cat bond will provide FONDEN and ultimately the Mexican government with a source of parametric insurance protection against losses due to earthquakes and named storms on both the Pacific and Atlantic coasts, securing the country a source of capital that can pay out rapidly after an event to assist with disaster relief.

The deal was launched with a $120 million sized CAR Series 113 tranche of Class A notes, that will provide the parametric earthquake protection across a three-year term, and can have a 25%, 50%, 75% or 100% payout, depending on a qualifying event’s characteristics. This tranche of earthquake linked notes, with a modelled expected loss of 3.43% were marketed to investors offering a risk margin of between 5% and 5.5%, are now targeting $140m to $150m in size and the pricing has fallen to below the initial range at 4.5% to 5%, we’re told.

An $85 million Class B CAR Series 114 notes which will provide Atlantic named storm protection over a three wind season term and a 25%, 50% or 100% payout possible, are now targeting $100 million of notes. With a modelled expected loss of 5.56% this tranche was marketed offering a risk margin in a range from 9.9% to 10.5%, but this guidance has been lowered to 9.3% to 9.9%.

A final $85 million Class C Series 115 tranche, offering Pacific named storm protection over a three wind season term and 25%, 50% or 100% payouts possible, is set to grow to $100m to $110m. This tranche has a modelled expected loss of 3.96% and were initially marketed offering a risk margin in a range from 6.5% to 7.1%, but this has been reduced to 5.9% to 6.5%, we’re told.

So all three tranches of parametric catastrophe linked notes are set to increase in size and at pricing levels which will close at or below the initial risk margin guidance ranges.

Once again this reflects the continued strong demand for new catastrophe bond issues, particularly any cat bonds that offer an element of diversification for ILS investors portfolios.

We understand that the deal size and pricing will be fixed today, while final completion for this latest World Bank supported catastrophe bond issuance will be in the first week of August.

We’ll update you as this IBRD / FONDEN 2017 cat bond proceeds to market and you can read about this and every other transaction in the Artemis Deal Directory.

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