World Bank issues $360 million Mexico catastrophe bonds

by Reuters
Friday, 4 August 2017 13:00 GMT

Residents stand at their house, which was damaged by a mudslide, in the aftermath of Tropical Storm Earl in the town of Huauchinango, in Puebla state, Mexico, in this 2016 archive photo. REUTERS/Imelda Medina

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The bonds are designed to cover costs of immediate emergency relief functions

By Dion Rabouin

NEW YORK, Aug 4 (Reuters) - The World Bank will issue $360 million in three-year catastrophe bonds on behalf of Mexico, the organization said on Friday, to be paid out in the event of hurricanes or earthquakes that devastate the country.

The bonds are part of World Bank's capital-at-risk notes program, created in 2014, which World Bank officials say aims to transfer risks related to natural disasters from developing countries to capital markets. The bonds are designed to cover costs of immediate emergency relief functions.

If a natural disaster occurs, some or all of the bond proceeds will be made available to the Mexican Fund for Natural Disasters, or FONDEN, provided it meets criteria set forth by the U.S. Geological Society or U.S. National Hurricane Center.

"Over the past 10 years, Mexico has built and expanded a long term strategy for catastrophic risk management," said Oscar Vela, head of insurance, pensions and social security at Mexico's Ministry of Finance. "This policy has the key objective of creating financial mechanisms to mitigate and stabilize the impact of natural disasters on fiscal accounts."

The bank issued a "pandemic bond" earlier this year to support immediate emergency financing facility in the event of a major health pandemic such as the 2014 Ebola outbreak.

This will be the largest Mexican catastrophe bond issuance to date, following a $290 million issue in 2009 and $315 million issue in 2012. In 2015, the bonds paid out 50 percent of the $100 million Class C tranche after Hurricane Patricia hit the country.

Michael Bennett, head of derivatives and structured finance at World Bank Treasury, said that despite investors losing half their principal in the last issue there was still sufficient appetite for the bonds to generate pricing appealing to Mexico, increasing the offering from an initial $290 million to $360 million.

"Demand for Mexico has been extremely strong," he said. "We saw that in 2012 and again for this transaction. Demand just keeps building because people have become increasingly comfortable with the model and with Mexico as a sponsor."

The bonds are divided into three insurance categories: hurricanes from the Atlantic Ocean, hurricanes from the Pacific Ocean and earthquakes with payout categories ranging from 25 percent to 100 percent.

Mexico previously issued catastrophe bonds in 2006, 2009 and 2012, though each of those were arranged by the World Bank through its MultiCat Program. The bonds announced Friday will be issued by the bank itself.

"The World Bank bonds we have launched today are not only a financial innovation — but also a milestone in our partnership with Mexico, and in our joint pursuit of preventing the human and financial tolls of earthquakes and floods," said Arunma Oteh, World Bank's vice president and treasurer.

(Reporting by Dion Rabouin)

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