WTW & Munich Re team on first parametric sovereign debt “catastrophe wrapper”

Broking group Willis Towers Watson (WTW) and global reinsurance company Munich Re have executed a world-first in creating a “catastrophe wrapper” around a sovereign debt transaction.

The idea is to boost the resilience of sovereign borrowers to climate shocks through the use of a parametric catastrophe insurance solution.

Willis Towers Watson (WTW) created the arrangement, which it calls a “game changer for building the economic and environmental resilience of island and coastal nations at risk from natural disasters.”

The parametric insurance has helped to make possible the Government of Belize’s debt restructuring for marine conservation, with the risk transfer helping Belize to refinance its sovereign debt under The Nature Conservancy’s (TNC) Blue Bonds for Ocean Conservation programme.

Munich Re, the global reinsurance company, provided the risk capacity to support the parametric catastrophe wrapper around the sovereign debt.

The Nature Conservancy announced its $364 million transaction with the Government of Belize in November, with the deal enabling the country to reduce its debt burden and generate an estimated $180 million for marine conservation.

It supported Belize’s commitment to protect 30% of its ocean, strengthen its governance frameworks for domestic and high sea fisheries, and set up a regulatory framework for coastal blue carbon projects.

The transaction was backed by the proceeds of a so-called “blue bond” arranged by Credit Suisse

The sovereign debt “catastrophe wrapper” created by WTW provides insurance protection to cover Belize’s loan repayments after hurricane events.

Wrapped around the 20-year sovereign debt structure, the parametric risk transfer will strengthen Belize’s sustainability and resilience to climate shocks that previously might have triggered credit rating downgrades and so exacerbated economic hardship for the population of the country.

Dr Simon Young, a Senior Director at Willis Towers Watson’s Climate and Resilience Hub, commented, “Volcanoes, earthquakes, and hurricanes repeatedly disrupt economic development in the Caribbean region, from households and communities to the sovereign level. That disruption leads to higher debt and a longer, more painful path to recovery.

“The parametric wrapper is a game changer for the financial resilience of island and coastal nations and will help to unlock the financing of nature-based solutions in achieving global net zero and biodiversity targets.”

Willis Towers Watson’s Alternative Risk Transfer team marketed and placed the parametric deal, saying that competitive pricing was achieved despite the hard market for Atlantic hurricane risk.

Munich Re offered the best terms and conditions and so was awarded 100% of the placement, which covers the first 31 months of the bond term.

WTW said this transaction shows “a template for integrated protection for creditors and issuers.”

Wrapping disaster or climate risk protection around financing and borrowing arrangements can be away to cover the risk of default, or shortfalls, in the event of significant catastrophe or climate risk events.

Integrating catastrophe and climate risk transfer with global securitizations of debt, assets and other similar instruments, is a way to bring greater resilience to the financings themselves, as well as to the people that can be affected by default, missed payments, or other issues that could occur when disasters strike.

This is precisely the type of arrangement that the insurance-linked securities (ILS) market could look to create solutions for, as a capital market structure to wrap climate or catastrophe protection around other financing arrangements would seem an attractive opportunity for investors.

When we talk about carving climate or disaster risk out of portfolios of assets, financial or physical, this is another example of something similar to that opportunity, so it’s encouraging to see this progress being made in connecting risk transfer and resilience to financing transactions.

Kevin Bender, Senior Director of Sustainable Debt at The Nature Conservancy (TNC), commented “Many coastal and island nations have three closely interlinked features: economic reliance on their valuable natural resources, higher exposure to the damaging effects of climate change, and unsustainable debt loads. In order to help solve the conservation funding needs of these nations, we also have to solve a complex web of financial risks. The catastrophe wrapper designed by Willis Towers Watson for the Belize transaction is a brand new solution that fills a much-needed gap.”

Michael Roth, Public Sector Practice Lead in the Capital Partners team at Munich Re, added, “Parametric insurance will be a powerful tool enabling borrowing countries hit by natural disasters to benefit from financial relief by a temporary waiving of debt service. By reducing the credit risk for sovereign lenders, borrowing countries may improve access to, as well as terms and conditions of, debt finance. The blue bond transaction combines nature conservation, risk reduction, sovereign financing and risk transfer in a unique way. We hope the bespoke Blue Bond transaction will be just the starting point for more environmental oriented shock-resilient sovereign debt bonds and loans to follow.”