Vivendi Universal has launched its first earthquake risk catastrophe bond and is believed to be only the second corporation to issue such an instrument. Wayne Cramer, v.p. of global risk management and insurance in New York, said as the financial stability of the insurance and reinsurance sector has continued to deteriorate, the company was looking for another way to offset its risk. "We don't want to be in the business of swapping earthquake risk for credit risk," he said.
The private placement, which will offset earthquake risk at Universal's studios and theme park in Los Angeles, is the first of its kind in the U.S., Cramer said. Rodrigo Araya, v.p. at Moody's Investors Service in New York, said as insurance premiums for companies have increased, securitizing risk via the bond market can be a more attractive alternative. He added that, for the first time, the rating agency has fielded inquiries from a handful of companies over the past year about issuing CAT bonds. Oriental Land became the first company to issue a CAT bond when it securitized earthquake risk for its Tokyo Disneyland theme park in 1999.
Universal's USD175 million offering was priced last week, with Goldman Sachs acting as the lead manager and book runner on the deal. The bond has a three-year maturity and is split into two tranches: USD150 million in notes, which was priced at LIBOR plus 5.1bps, and USD25 million in preference shares, priced at LIBOR plus 8bps. An investor in the deal said spreads have tightened for CAT bonds over the past year because more investors have started snapping up the CAT risk as corporates' credit quality has deteriorated. Additionally, spreads in all new products typically tighten as investors become more familiar with the instruments, he noted.
Vivendi Universal's captive in Ireland, called Gulf Stream, entered into a reinsurance contract with Swiss Re, which then entered into another reinsurance contract with Studio Re--the special purpose vehicle through which the bond is being issued. Gary Sullivan, spokesman at Swiss Re in New York, and Bruce Corwin, spokesman at Goldman in New York, declined comment.
The issue will be linked to a parametric measure, which is a synthetic system used to determine when the investors will pay out, regardless of the damage, according to Cramer. This particular measure uses a damage index value, which measures the spectral acceleration--how much the ground is shaking--at the studio and theme park, and will pay out if the acceleration is at a certain level. The alternatives to this are index-based or indemnity-based deals, which are linked to industry-wide losses.
