Hannover Re plans 75 mln euro catastrophe bond-investors
* Plans catastrophe bond to cover European storm risks
* Unique repo-based collateral mechanism
* Second bond of 2009 to reference non-U.S. peril
LONDON, July 13 (Reuters) - Hannover Re (HNRGn.DE) is marketing a 75 million euro catastrophe bond that will cover the world's fourth-largest reinsurer against extreme losses from European windstorms, investors said on Monday.
The transaction, the second to be launched via Hannover Re's Eurus special purpose vehicle, will employ a novel repo-based collateral mechanism, the brainchild of investment bank BNP Paribas, which is structuring the deal with Aon Benfield.
Collateral security has been a key concern for catastrophe bond investors and sponsors since last year's collapse of Lehman Brothers exposed a structural flaw making the securities more vulnerable to credit risk than previously thought. [ID:nLQ030447]
"We intend to renew Eurus," said a Hannover Re spokeswoman, referring to the reinsurer's catastrophe bond of July 2006, which matured recently. She declined to give further details.
That deal, Hannover Re's first tradeable catastrophe bond, used a parametric trigger based on wind speeds, meaning it is not tied to the reinsurer's actual losses. The new transaction is expected to carry a similar trigger.
The $150 million 2006 bond, rated BB by credit rating agency Standard & Poor's, gave Hannover Re three-year coverage against losses arising from severe windstorms in Belgium, Denmark, France, Germany, Ireland, Netherlands and the United Kingdom.
Investors said the new Eurus II transaction is expected to pay a coupon of 6.75 percent to 7.25 percent over Libor, substantially less than this year's nine previous cat bonds, nearly all of which have been based on riskier U.S. perils.
AIR Worldwide will be risk modeller for the transaction, which will carry an expected loss of about 1.6 percent.
The bond is expected to close at the end of July.
COLLATERAL
Specific details of the bond's collateral structure were not available, but BNP Paribas has proposed a solution based around a tri-party repurchase agreement between an investment bank, the issuer, and clearing house Euroclear.
The scheme would use the bank's portfolio of investment-grade corporate bonds, a liquid and transparent asset, to generate Libor returns, with overcollateralisation to provide a cushion against fluctuations in market prices.
This year's previous cat bonds have employed innovative structures to neutralise credit risk, but disagreement over whether such securities must continue to offer a Libor-based return is hampering the search for a new industry standard.
Eurus II will be only the second transaction this year to be based on a non-U.S. peril, and should appeal to investors seeking a more diverse spread of cat bond risks.
The relatively low yield offered by Munich Re's (MUVGn.DE) Ianus Capital transaction last month apparently put off some investors, however, and the deal was downsized to 50 million euros from 100 million euros intially marketed.
The three-year bond protects the world's biggest reinsurer against losses from European windstorms and Turkish earthquakes.
Insurers have used catastrophe bonds since the 1990s to manage their exposure to natural disasters by transferring potential losses to investors, who receive a high interest rate but risk losing their principal if a catastrophe occurs.
Total issuance is forecast to reach about $3 billion in 2009, about half of which has already been placed. (Additional reporting by Jonathan Gould in Frankfurt; Editing by Jon Loades-Carter) ($1=.7035 Euro)
