In another sign that investors will not keep lowering the relative returns on catastrophe bonds the Ursa Re Ltd. (Series 2014-1) cat bond, sponsored by the California Earthquake Authority, has been priced above the original mid-point.
It’s the first cat bond in a while to price higher than the middle of the coupon guidance range, as almost everything dropped through the bottom of the range earlier this year. The cat bonds to launch in Q4 have been a different story though, with them so far showing signs that investors have neared the bottom of their appetite for taking on risks for ever lower prices.
The Ursa Re cat bond, split into two tranches, will provide the CEA with a source of fully-collateralized California earthquake reinsurance on an aggregate basis and using an indemnity trigger.
The deal launched seeking $350m of capital markets cover which was to be split between the two tranches as $150m of Class A notes and $200m of Class B. The Class A tranche of notes, which is the less risky of the two, then upsized to $200m thanks to investor demand, taking the total deal size to $400m and making this Ursa Re cat bond the largest sponsored by the CEA to date.
The pricing for the two tranches launched with guidance of 3% to 3.75% for Class A, which subsequently narrowed to 3.25% to 3.5%. The Class A notes have now been priced at the top of that revised range, so above the initial mid-point of guidance, at 3.5%. Interestingly that gives this tranche a multiple of the expected loss of 1.2% to coupon of 2.9X, which is aligned with the average seen this year.
Meanwhile the Class B notes launched with coupon guidance of 4.5% to 5.25%, which was then narrowed to 4.75% to 5%. The Class B notes also priced at the top end of revised guidance, at 5%, again above the initial mid-point. These notes, with an expected loss of 2.62% have a much lower multiple, coming in at 1.91X, suggesting investors perhaps had greater appetite for the higher coupon.
It is encouraging that, despite the strong demand for catastrophe bond paper, investors have not chased the coupons right down with the recent deals. However, it should be noted, that this could really be more to do with where the guidance has been set rather than true push-back from investors. It does, however, suggest that a floor continues to be established or neared.