Talk about suspense.
Investors in Multi-Cat Mexico 2012-1 are waiting to hear whether the riskiest tranche of the catastrophe bond sustained a partial or total loss as the result of Hurricane Patricia, but the latest reading is just too close to call.
It all hinges on wind pressure.
Multi-Cat Mexico was issued by the Mexican government under the World Bank’s “MultiCat” program. It was designed to transfer the risk of damage from wind storms on the Pacific coast of Mexico. In the event that a trigger is reached, investors forfeit their principal as these funds become available to the sponsor.
The deal uses what is known as a ‘parametric’ trigger; it is based on the wind pressure measured at a number of stations in the covered area, and not on actual losses. According to Standard & Poor’s, which rated the Multi-Cat Mexico, the transaction documents state that noteholders would lose 50% of their principal amount if the central pressure is between 932 and 920 millibars, and 100% if lower than or equal to 920 millibars.
Hurricane Patricia was so strong when it made landfall on Mexico’s Pacific Coast in October that it seemed almost certain that investors in the $100 million of class C notes would lose at least half of their principal, but investors are still awaiting a final report from the calculation agent, AIR Worldwide, to determine how much of a loss.
In a report published today, S&P said that the latest update from the National Hurricane Center puts the reading right on the dividing line, at 920 millibars, at one of the stations (located at located at 19.4N 105.0W).
S&P downgraded the class C notes to ‘D’ this morning, but not because of the latest wind pressure reading. Instead, the downgrade was triggered because the deal’s arranger, Swiss Re, had to request a maturity extension for the class C notes, which were set to mature on Friday, Dec. 4, before the size of a loss could be determined.
Maturity will now automatically extend by one month each month through June 2016 unless Swiss Re requests otherwise, and this extension will reduce the annual interest spread to 3% from 7.5%. Standard & Poor’s considers this coupon stepdown to be an event of default.