Investors flock to Pacific Alliance’s multi-tranche CAT bond

Investors flock to Pacific Alliance’s multi-tranche CAT bond

Bonds Capital Markets Debt Fixed Income

This week, the Pacific Alliance (PA) issued the largest sovereign risk insurance transaction ever seen and the second-largest catastrophe bond in history. And according to two officials at the World Bank, the bond sale potentially opens the market for other sovereign issuers.

The bloc, comprising Chile, Colombia, Mexico and Peru, jointly printed $1.36bn across five tranches of earthquake coverage.

As previously reported in LatinFinance’s Daily Brief, Mexico raised two tranches, both maturing in two years, while the rest printed a three-year portion apiece.

Chile sold a $500m tranche at 2.5%, while Colombia snapped up $400m at 3% and Peru issued $200m at 6%.

Mexico’s efforts garnered $160m at 2.5% and a $100m tranche paid investors 8.25% because different biometric triggers impact the securities.

The PA originally sought $1bn in CAT securities, but demand swelled to $2.5bn after 45 investors pledged interest to the deal, Michael Bennett, the World Bank’s head of derivatives and structured finance told LatinFinance.

Bookrunners, therefore, reeled in pricing on issue day and increased the transaction size.

Concerns of a hurricane season in the US also did not seemingly impact the investor demand for the transaction. And Mexico’s $150m CAT bond payout last October, also did not influence pricing on the PA’s trade, Bennett added.

“The fact Mexico came back to the market so rapidly after the bond triggered was well-received… Investors want to develop a long-term relationship,” he said of links between the buy- and sell-side.

Hunger for more

Antonio Davila-Bonazzi, lead financial officer at the World Bank treasury said there was “no question” the PA’s efforts would generate heightened demand. He also said the transaction proved new sovereigns could issue these instruments in today’s market conditions.

PA members Chile and Peru may even look to the capital markets for deeper areas of coverage. “There was talk of tsunami coverage for Chile and Peru and I think they will look into that in the next round,” Davila-Bonazzi said.

In addition to capital, Paul Schultz, CEO at AON Securities, said the CAT bond paved the way for governments to develop risk management programs, particularly for uninsured exposures.

PA members’ geography leaves them open to potential natural disasters. In the last 18 months alone, Peru has been hit by mudslides, while Mexico experienced two earthquakes in 2017. In Colombia, a landslide in April left more than 250 people dead and Chile is placed on an active earthquake zone.

The World Bank issued the transaction with Aon Securities, reinsurer Swiss Re and Citi acting as joint bookrunners. Aon and Swiss Re were also structuring agents, while AIR Worldwide supported the modeling and calculation behind the trade.

Within the PA, only Mexico has printed CAT bonds. The sovereign issuer raised the instruments in 2006, 2009, 2012 and in August it sold $360m in financial protection against earthquakes and tropical cyclones.