New York's Metropolitan Transportation Authority is prepping a catastrophe bond that is the first to have triggers linked only to storm surge and no other aspect of hurricane-related risks, according to a presale report from Standard & Poor’s.

A few sources either in the industry or close to the MTA also said they had not heard of any cat bond ever coming from the transportation agency. An MTA spokesman declined to comment.

S&P gave the deal a ‘BB-(sf)’ rating.

Based on offering documents, the transaction is now sized at around $125 million, according to a source from cat bond website

The expected term is three years. The sole bookrunner is GC Securities, and co-senior manager Goldman, Sachs & Co. Both are joint structuring agents.

The transaction is expected to close sometime this month, according to S&P’s presale.

The deal will enable the MTA to hedge against the sort of storm surge damage incurred by Hurricane Sandy.

It is backed by a reinsurance agreement between the issuer, MetroCat, and the First Mutual Transportation Assurance (FMTAC), a wholly-owned unit of the MTA established to insure and reinsure the risks faced by the MTA.

As part of the transaction, FMTAC gets three years of per-occurrence reinsurance protection against the storm surge.

If certain surge levels occur during a named storm and therefore hit the triggers pre-set by the transaction, then Metrocat makes a loss payment to FMAT that is 100% of the principal amount. This could translate into bondholders themselves suffering losses.

The risk modeling agent used in the transaction is Risk Management Solutions (RMS). S&P said the deal’s creditworthiness is linked to the modeled probability that there would be a triggering event based on the levels pre-set for zones A and B. The agency said that it adjusted for a higher probability of a trigger event than that anticipated by RMS model. “We then assigned the preliminary rating by selecting the next rating category below this adjusted probability of attachment that is greater than or equal to the adjusted default probability from our insurance-linked securities default table,” the agency said.

S&P added that among the risks to bondholders getting their full investment back was the fact that water-level data from older historical events used by RMS may not be as “robust” as that stemming from recent events such as Hurricanes Sandy and Irene. In addition, the agency noted that two of the last three hurricanes to make landfall in the U.S. did so in the Northeast.

On the other hand, S&P listed a number of strengths such as RMS’s deep experience in the sector, and the fact that since 1900 only two hurricanes would have hit the trigger levels defined in the structure. These are Hurricanes Donna (1960), and, of course, Sandy.



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