Mia Hamm, hammering in yet another goal for the USA women's world cup, is one reason the world is in tune with Federation Internationale de World Cup Football Association (FIFA). But for the securitization industry, the draw might be its new US$260 million catastrophe bond that covers the cancellation risk of the 2006 FIFA World Cup Germany.

It's not the first time the global soccer governing body has tried out the benefits of securitization, though FIFA's first venture was a disappointment. While in the structuring phase of the deal, FIFA's marketing partner, International Sports Media and Marketing, filed for bankruptcy. To add to its mounting problems, the group also lost the backing of its triple-A wrap provider, AXA Insurance. The securitization was completed, though without the sizable public triple-A piece that would have sold via AXA's guarantee. There is an ongoing legal embroilment associated with the timing of AXA's withdrawal from the deal.

This time around FIFA has decided to do things differently. Instead of involving an insurer, it has issued a structured bond through Credit Suisse First Boston that protects FIFA from cancellation risk of the world cup - covering both natural and manmade made catastrophes.

"It's probably the first catastrophe bond to cover terrorism," said one analyst, adding, however, that because CAT bonds are generally privately placed, it's difficult to gauge just how many deals before might have also covered terrorism risk.

About 90% of FIFA's total revenues are drawn from the World Cup, reported analysts at Moody's Investors Service, the only agency on the deal. Moody's believes that it is in FIFA's interest to do all it can to ensure that the event takes place,;otherwise FIFA faces repayments of uptoCHF1.2 billion (US$914 million) to television companies that purchased the rights to broadcast the event. Such an event would be catastrophic to FIFA.

The deal is structured as a typical CAT bond, a CDO-like synthetic risk transfer. Essentially, the proceeds of the sale will be invested in low-risk collateral, and will be liquidated for the benefit of FIFA if a cancellation occurs as a result of an event that satisfies the deal documentation (there is an independent committee of three arbitrators to determine this, should a cancellation occur). Otherwise, the collateral is liquidated at maturity and repaid to investors.

If, for any reason, the final match is delayed, FIFA has until August 31, 2007 to reschedule the match. "In the circumstance that the 2006 FIFA World Cup final match is not completed as scheduled, FIFA may choose to relocate to another country or, if Germany declares that it no longer wishes to host the event, or there is a domestic war declared in Germany, FIFA must attempt to complete the tournament by relocating elsewhere," explained a Moody's analyst.

Modeling for terror

CAT bonds are not a new asset class, and, in fact, industry players have predicted a boom for some time now, though various hurdles - including the time it takes to structure a deal - have kept the sector in check (see ASR9/22/03). The much talked-up possibilities for securitizing terrorism risk had all but fallen by the wayside, at least visibly.

"I have not seen who modeled the terrorism risk, or even if it was modeled," said one industry analyst. "CAT bonds work because both the buyer and the seller agree that the modeled results represent a reasonable estimate of the risk of loss - it would be interesting to see how the probability of loss estimate was derived in this transaction."

According to Moody's, in assessing the risk of a terrorist event it adopted a logic tree approach similar to a model provided by Risk Management Solutions Inc. that is largely based on the assumption of FIFA's desire and ability to postpone the event as opposed to cancellation. "The biggest risk that Moody's perceives on not holding the event is the assertion by Germany that they cannot guarantee the safety of teams or supporters," reported Moody's in its pre-sale report.

The transaction is structured in four tranches: a US$210 million floating rate tranche priced at 150 basis points over Libor, a fixed-rate CHF30 million (US$22.7 million) piece that priced at 150 basis points over mid-swaps, a E16 million (US$18.7 million) floating-rate piece pricing at 150 basis points over Euribor and a US$10 million fixed-rate piece priced at 150 basis points over mid-swaps.

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