March 11th, 2009

Shelf Offerings 100% of 2008 Issuances

Posted at 1:00 AM ET

GC Securities, a division of MMC Securities Corp.*
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Shelf offerings have become increasingly common in the catastrophe bond market. First introduced in 2002, this concept of creating a platform for multiple note issuances evolved from the medium-term note programs developed for corporate debt issuers in the capital markets. The advantages of shelf offerings are substantial when compared to the serial approach to catastrophe bond issuance which preceded this innovation. Issuers appear to value the structure, as 100 percent of the catastrophe bonds issued in 2008 used the shelf offering structure. This unanimity among issuers is a profound endorsement of shelf offerings.

The catastrophe bond shelf offering platform was introduced in 2002 with the Pioneer transaction, which accounted for USD386.5 million of risk capital via three takedowns during the year. Once introduced, however, the use of shelf offerings began to grow. Two of seven issuances in 2003 were shelf offerings, accounting for 24 percent of the total risk capital issued. Despite a drop in the number of issuances in 2004, from seven to six, shelf offerings held steady at two (representing 34 percent of risk capital issued). After a short dip in 2005, the shelf offering “share” of total risk capital issued increased to 54 percent in 2006, 70 percent in 2007 … and finally, in 2008 100 percent of risk capital issued.

It is hardly surprising that issuers have been drawn to shelf offerings, as their multi-peril issuance capability enhances risk and capital management. Using a shelf offering, an issuer can construct an issuing platform that mirrors its portfolio of risk perils, which can then be used for price discovery of any (or all) of the perils covered. This also supports a flow of communication that can facilitate reverse inquiry issuances. Because a substantial portion of issuance costs have been paid once (up front), incremental usage of the program amortizes this fixed cost over many issuances. In recent years, the incremental cost and time required to create a “reusable” shelf program (relative to a non-shelf, single issuance facility) has fallen. Accordingly, catastrophe bond sponsors have elected to use shelf programs to secure a substantial improvement in protection utility in exchange for a nominal increase in expense.

However, it is important to note that frictional cost management is often over stated as a motivation for shelf program usage. On a more strategic level, shelf programs have more to do with opening new and consistent alternatives to securing the most competitive capacity available. Critically, shelf programs enable sponsors to access additional capacity opportunistically. Instead of going to the market with a fixed issuance amount and potentially paying an extra premium to clear a large deal, sponsors can approach the market over the course of several (individually smaller) issuances that could aggregate to a larger targeted amount.

Because shelf offerings encourage repeated interactions between sponsors and catastrophe bond investors there is ample opportunity for increased familiarity (and trust) between market participants to develop. Often the benefits of this familiarity can manifest themselves through improved pricing and terms for consistent repeat issuers, and more favorable secondary market pricing for existing bonds in the aftermath of a potentially significant catastrophe event.

The reduced cost and increased flexibility afforded by shelf offerings have advanced the utility of catastrophe bonds for risk and capital management. In 2008, issuers perceived the benefits and voted for this structure with their capital. Generally steady growth since 2002 has confirmed the advantages of shelf offerings, but the market does not stand still. Risk transfer instruments will evolve alongside issuer demand for new ways to protect their capital.
*Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.

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