New York's Metropolitan Transportation Authority (MTA), the biggest transportation network in North America, is selling a $125 million "catastrophe" bond designed to cover the costs of damage from a future storm or hurricane, investors said on Monday.
The MTA, which suffered a $5 billion hit from Hurricane Sandy in October 2012, will be able to offload the risk of incurring similar storm-related losses to investors, who will receive a yield in return for agreeing to pick up future repair bills.
New York is preparing for an increase in severe weather after Sandy caused more than $30 billion of damage in the state. The city has just announced a $20 billion infrastructure plan to boost its storm defenses, and the state now includes a warning about severe weather threats in its bond prospectuses.
The MTA bond will be issued by First Mutual Transportation Assurance Co, a so-called captive insurer, or insurance company that the MTA set up to sell similar financial instruments to specialist investors.
The MTA, which operates New York City's subway and bus system, area bridges and tunnels and commuter railroads, declined to comment, citing legal reasons. Marketing for the deal is believed to be ongoing.
First Mutual will sell the cat bond through a Bermuda-based vehicle called MetroCat Re Ltd, which transfers all potential losses to capital market investors. Investors receive a high rate of interest but risk losing all or part of their money if a catastrophe occurs.
Standard & Poor's assigned a BB- rating to the notes to be issued by MetroCat Re 2013 Ltd, the credit rating agency said in a report issued on Friday.
A 2010 examination of First Mutual conducted by New York regulators indicated that it had about $1 billion in reinsurance lined up for property claims. But once that money runs out, someone else has to step in.
After Hurricane Sandy, the MTA took on short-term debt and squeezed its already-tight budget to pay for nearly $4.8 billion of repairs to its infrastructure. It also posted $268 million in operating losses.
Cat bond sales are expected to hit record levels by the end of 2013 - at least matching the market record of $7 billion, according to brokers and reinsurers.
The sector has seen an estimated $4.36 billion of issuance so far in 2013, according to the Willis Capital Markets and Advisory, the capital markets arm of reinsurance broker Willis Re.