Published On: Thu, Jul 10th, 2014

World Bank issues its first ever catastrophe bond linked to natural hazard risks in sixteen Caribbean countries

world_bank_headquartersWASHINGTON, DC, U.S.A. (WB) - The World Bank (International Bank for Reconstruction and Development, IBRD) announced its first ever catastrophe bond ('cat bond').

This three-year USD 30 million transaction is the first of the World Bank’s newly created Capital-at-Risk Notes Program. The bond is linked to earthquake and tropical cyclone risk in sixteen Caribbean countries.

By issuing this bond, the World Bank is now able to provide re-insurance to the Caribbean Catastrophe Risk Insurance Facility (CCRIF). CCRIF is a risk-pooling facility that is designed to limit the financial impact on its sixteen Caribbean member governments resulting from catastrophic earthquakes and hurricanes by quickly providing financial liquidity when a policy is triggered. CCRIF was developed under the technical leadership of the World Bank and with a grant from the Government of Japan. It was capitalised through contributions to a multi-donor Trust Fund by the Government of Canada, the European Union, the World Bank, the governments of the UK and France, the Caribbean Development Bank and the governments of Ireland and Bermuda, as well as through membership fees paid by participating governments. CCRIF is now expanding to include several Central American countries with the support of the governments of Canada, the United States, and Mexico and potentially other donors.

As a hedge for its obligations under the cat bond, the World Bank has entered into a catastrophe swap with CCRIF that mirrors the terms of the cat bond. If the bond is triggered by a referenced natural hazard, then the principal of the bond will be reduced by an amount determined under the bond terms and an equivalent amount will be paid to CCRIF under the swap.

The placement agent for the cat bond is GC Securities, a division of MMC Securities Corp. The co-structuring agents on behalf of the CCRIF are GC Securities and Munich Re. Swiss Re Capital Markets acted as advisor to the World Bank.

The World Bank first became active in the cat bond market in 2009 when it established the MultiCat Program that allows countries to access the cat bond market through a common documentation platform. The MultiCat Program, under which the World Bank acts as arranger but not issuer of the bonds, was used by the Government of Mexico in 2009 and again in 2012 for highly successful transactions that transferred earthquake and hurricane risk to the market.

“The World Bank’s new Capital-at-Risk Notes Program is an innovation for both our clients and investors, and marks a further extension of our disaster risk management work, which also includes structuring and intermediating cat and weather swaps, providing catastrophe contingent loans and acting as arranger of the MultiCat program. With this first transaction under the Capital-at-Risk Notes Program, CCRIF benefits from access to the highly competitive prices offered by the cat bond market as well as from the efficiency of using this program. At the same time, cat bond investors benefit from exposure to new perils”, said Madelyn Antoncic, Vice President and Treasurer at the World Bank.

“CCRIF welcomes this Capital-at-Risk Notes Program and recognizes that this cat bond would enable the Facility to capitalise on the increasing participation of institutional investors in the reinsurance market. CCRIF is always actively trying to source the best policy pricing for existing and new members and this cat bond will provide strategic benefits in that it will broaden capacity over time which in turn would help to better manage volatility in the reinsurance market. We are indeed pleased to be the beneficiary of the World Bank's first ever catastrophe bond and for this induction to the capital markets”, said Isaac Anthony, CEO, Caribbean Catastrophe Risk Insurance Facility.

The World Bank has been helping CCRIF transfer risks to the re-insurance market since 2007. This inaugural transaction under the World Bank's Capital-at-Risk Notes Program is a further substantial step in the evolution of the partnership between the two institutions.

“This new innovative structure can also be used to hedge other risks such as credit risk which could enable the World Bank to expand our lending capacity”, said Antoncic.

“The creation of the World Bank’s Capital-at-Risk Notes Program is an important milestone in the development of the public sector risk transfer market and streamlining access to the capital markets. GC Securities is honored to have collaborated with the World Bank on the inaugural transaction on behalf of the CCRIF”, said David Priebe, Vice Chairman, Guy Carpenter.

“We are happy to have been able to support the World Bank by co-structuring their first-ever catbond transaction and we are also proud of still being one of the major risk carriers in the CCRIF itself. We had been involved in the development of the CCRIF concept back in 2007 from the outset and therefore are very happy that this innovative cross-national coverage concept still supports the countries involved with insurance cover against the different natural perils the Carribean is exposed to”, said Georg Daschner, member of Munich Re’s Board of Management responsible for Europe and Latin America.

“Governments' fiscal positions are increasingly exposed to natural catastrophes and climate change. Swiss Re Capital Markets is proud to have supported the World Bank in forming the Capital-at-Risk Notes Program to provide governments another instrument to transfer these risks to institutional investors. Inaugurating the Program with the CCRIF further demonstrates that disaster risk management has become a cornerstone of tackling sovereign contingent liabilities”, said Martyn Parker, Chairman Global Partnerships, Swiss Re.

Transaction Summary:

Issuer: World Bank (International Bank for Reconstruction and Development,
‘IBRD’)
Nominal amount:

USD30,000,000

Redemption amount: The nominal amount reduced by all principal reductions as a result of
applicable Caribbean tropical cyclone or earthquake events (as defined in the terms of the notes)
Settlement date:

June 30, 2014

Coupon:

6 month LIBOR + 6.30%, floored at 6.50%

Coupon payment dates:

Quarterly

Maturity date:

June 7, 2017

 

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