A €350 million ($473 million) catastrophe bond providing coverage for AXA Global P&C just closed, according to press releases from lead structurer Swiss Re Capital Markets Corp. and co-arranger Natixis.
Both shops were joint bookrunners on the deal, which Swiss Re called the largest euro-denominated cat bond to date.
The bond is split into two tranches. Class A notes totaling €185 million have an expected three-year maturity, while €165 million in B notes have a four-year term. Standard & Poor’s rated the A piece ‘BB-(sf)’ and the B tranche ‘B+(sf).’
Final yield on the A piece came to 260 basis points over notes issued by the European Bank for Reconstruction and Development (EBRD), which are priced at three month Euribor minus thirty basis points. If Euribor is below 30 basis points, then the benchmark is simply zero. The B spread was 290 basis points over. The same EBRD paper is in the collateral accounts of the transaction.
The deal collateralizes a contract with AXA, providing protection against windstorms in Belgium, Denmark, France (excluding French overseas territories), Germany, Ireland, Luxembourg, The Netherlands, Norway, Sweden, Switzerland, and the United Kingdom.
The catastrophe risk comes from the modeled probability of attachment. Once a deal is “attached” investors start to see losses, which rise until the transaction hits its exhaustion point. At this threshold, investors can’t expect to recover anything as the full principal will have flowed back to the sponsor.
Models for gauging European windstorm risk have a long track record, according to a report from S&P.
Among the deal’s weightier risks is the fact that AXA can reset the attachment and exhaustion notes each year and is actually required to reset the class B notes for the second annual risk period. Following a reset, the one-year probability of attachment can hit 2.05% for the A tranche and 3.2% for the B one.
The Lothar windstorm in 1999 could have triggered the B notes if the notes are reset to the 3.2% probability. Lothar unleashed winds with speeds of a Category 2 Hurricane.
The calculation and reset agent is risk modeling firm EQECAT.
If a windstorm hits any of the covered European countries and losses in the index compiled by EQECAT equal or exceed €2.11 billion for the class A notes and €1.78 billion for the class B, then investors will start to see losses.
