Catastrophe Bond Update: Second Quarter 2010 – Activity Surges…Reflecting Favorable Issuance Conditions and Strong Investor Demand: Part II
Execution Study and Further Commentary on Second Quarter Market Dynamics
During the fourth quarter of 2009, the first quarter of 2010 and the beginning of the second quarter of 2010, transactions had generally been reaching issuance targets or upsizing and pricing at or below the midpoint of their initial spread guidance range. This trend moderated and in some cases reversed itself during the second quarter of 2010 as investors, though flush with cash due to inflows and maturities of existing positions, were disinclined to accept additional U.S. wind risk. Because nearly all of the new issuance available during the second quarter included U.S. wind exposure, transactions coming to market in late April or May faced more challenging market conditions which in some cases resulted in concessions being made by protection buyers with respect to deal size and spread levels.
The exhibit immediately above plots eligible catastrophe bond tranches (2) which closed during the fourth quarter of 2009, and the first and second quarters of 2010. The interplay of two factors is explicitly considered. First, along the x-axis, the final issuance amount of each tranche relative to its announce target size is captured. Secondly, along the y-axis, each tranche’s final spread as a percentage of the midpoint of its initial guidance range is captured. Tranches occupying the northeast quadrant of the plot area priced at final spreads below the midpoint of their spread guidance while also managing to upsize relative to announce targets. Conversely, tranches occupying the southwest quadrant of the plot priced at final spreads above the midpoint of the initial spread guidance while not reaching their stated issuance targets. Data point sizes are scaled relative to one another based on the issuance amount of each tranche.
These results must be interpreted carefully, as multiple factors can be at play with respect to spread and sizing levels at announcement and final capacity purchase and protection requirements and spend decisions. Additionally, there are variations in peril, trigger and sponsor that also can influence execution. It is an oversimplification (and not at all the intent of this exhibit) to categorize transactions by quadrant and therefore conclude something meaningful about the “success” of an individual transaction due to its coordinates.
With that said, the analysis is illustrative in that it reveals the shifting of market sentiment over the course of the past nine months and over the course of the second quarter of 2010. In particular, late 2009 and early 2010 transactions tended to garner more support at tighter spreads (relative to stated targets) than transactions marketed during the second quarter of 2010. Within the second quarter of 2010, transactions brought in the earlier weeks, before the surge of deal activity, tended to fare better than transactions coming later in the quarter. With obvious benefit of hindsight, this analysis suggests that during the second quarter of 2010 there was a benefit (from a sponsor perspective) to being a first-mover and bringing transactions before or towards the beginning of a “peak issuance” period.
 In order to be considered in this exhibit a tranche must have included both a bracketed issuance size target and bracketed spread guidance range at initial announcement
• Cory Anger, Managing Director**
• Chi Hum, Managing Director**
• Hong Guo, Managing Director**
• Ryan Clarke, Vice President**
• Brad Livingston, Analyst**
ILW market commentary provided by
• Barry Law, Managing Director (Guy Carpenter London)
• Larry Rothstein, Vice President (Guy Carpenter London)
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