According to investment fund manager Plenum Investments, the World Bank-facilitated catastrophe bond in the Philippines is considered “likely to default” following the landfall and impacts of Super Typhoon Noru.
We reported yesterday that the World Bank of the Philippines issued an IBRD CAR 123-124 catastrophe bond should be considered at risk, after Typhoon Noru (Karding, as it is known locally) rapidly intensified to a major category storm before making landfall.
Typhoon Noru escalated explosively into Super Typhoon Noru, with its sustained winds gaining nearly 100 mph over a 24-hour period and the storm growing from a relatively minor typhoon to one strong enough to trigger the Philippine government catastrophe bond agreement.
The Philippines catastrophe bond had already defaulted once and made a principal repayment to the Philippines after Super Typhoon Rai, after which the Philippine government received a payment of US$52.5 million of the principal from the cat bonds, representing a payment of 35% of the $150 million class B catastrophe bonds exposed to cyclone risk.
The cat bond covers both winds and rainfall from tropical cyclones, with the wind trigger usually being calculated first, although it takes a few weeks, after which rainfall amounts are also traversed by the model.
The cat bond also went through the calculation process for Tropical Storm Megi (locally known as Storm Agaton) earlier this year as well. But as we reported at the time, no additional payment was due for this storm.
Super Typhoon Noru is putting notes at risk, however, and Zurich-based catastrophe bond and reinsurance investment fund manager Plenum Investments is the first to comment on the storm.
After Super Typhoon Rai paid off, the Philippine government has $97.5 million in outstanding catastrophe bond principal to provide cyclone protection against this storm.
Commenting on Super Typhoon Noru, Plenum Investments said it believed “the World Bank’s CAT bond is likely to default”.
Plenum Investments provided further details on its thinking: “There is only one CAT Bond (IBRD CAR 124 B) in the World Bank program that is directly exposed to this risk. Payments under this CAT bond are triggered by a so-called “model loss” mechanism, which uses measurable storm parameters to determine the financial loss of a portfolio of insured assets. Payment determination is quick, but usually takes several weeks.
“Due to the strength of the typhoon and the affected region around the capital city of Manila, we assume that there is a high probability of default on the bond.
The “Typhoon “Rai” (Odette), which occurred last December, had already led to a 35% reduction in the nominal value.
“We only hold a minimal position in this bond in the Plenum CAT Bond Fund, and the negative contribution to performance from this position will remain below 0.20%.
Which confirms our own hypothesis that it will be a typhoon that activates the calculation agent process for the Philippine government’s World Bank Catastrophe Bond.
It will take a few weeks for a decision to be made and we will update you as soon as information becomes available on the calculation process and whether Super Typhoon Noru has again triggered the disaster bond in the Philippines.
You can learn all about the Philippines’ landmark catastrophe bond, IBRD CAR 123-124 issue, in our comprehensive catastrophe bond Directory of offers which includes details of over 850 transactions.