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Derivatives

Calyon Closes Cat Bond CDO

Calyon has closed what it believes to be the first collateralized debt obligation of risk-linked contracts.

Calyon has closed what it believes to be the first collateralized debt obligation of risk-linked contracts. The offering, Pinnacle, is referenced to a portfolio of catastrophe bonds and insurance-linked derivatives, said Jorge Fries, managing director in New York. Calyon was the sole arranger and the sponsor was undisclosed. Cat bonds are risk-based securities that allow insurance and reinsurance companies to transfer the risk of natural catastrophe insurance to the capital markets.

The Pinnacle securities are based on a reference portfolio of U.S. hurricane and earthquake risk. Some of the bonds were already owned by the sponsor, which Fries declined to name. Applying CDO technology to this asset class allowed Calyon to achieve a high investment-grade rating for the senior tranche and attract a new class of investors. Half of the senior tranche was rated A plus by Standard & Poor's.

The Pinnacle transaction is split up into a USD30 million senior tranche, a USD33 million mezzanine tranche and USD65 million of equity, which was retained by the sponsor. All the senior and mezzanine portions were placed with third-party investors. Pinnacle is also the first cat bond deal on which Calyon was sole arranger. Fries declined to discuss pricing. The deal closed Sept. 18.

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