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Fitch Corrects Error Rating Three IBRD Catastrophe-Linked Notes; Withdraws Ratings
October 12, 2017 / 12:53 AM / in a month

Fitch Corrects Error Rating Three IBRD Catastrophe-Linked Notes; Withdraws Ratings

(The following statement was released by the rating agency) LONDON/NEW YORK, October 11 (Fitch) Fitch Ratings has corrected an error in rating certain catastrophe-linked notes issued by the International Bank for Reconstruction & Development (IBRD, AAA/Stable). The correction resulted in the catastrophe-linked note ratings being lowered from their original ratings and subsequently withdrawn. This rating action does not imply any change in the creditworthiness of IBRD itself given the nature of the affected catastrophe-linked notes. As such, IBRD's Issuer Default Ratings (IDR), senior unsecured debt rating and market-linked security ratings remain unaffected. Fitch incorrectly assigned ratings to the catastrophe-linked notes issued under IBRD's 'Capital at Risk Notes' program, which is part of the bank's global debt issuance facility. The terms and conditions of the catastrophe-linked notes specified that they were not intended to be rated. In addition, in assigning the ratings, Fitch only applied its Supranationals Rating Criteria, dated 18 May 2017, rather than also applying its Insurance-Linked Securities Rating Criteria, dated 29 June 2017 (ILS Criteria), which should be applied in the analysis of catastrophe-linked bonds. Other Fitch-rated catastrophe-linked notes are typically rated at non-investment grade levels. Fitch's policy is that, where possible, it must assign the rating that most appropriately reflects the credit profile of the catastrophe-linked notes prior to the withdrawal of ratings. As such, Fitch has downgraded and withdrawn the ratings on three classes of IBRD catastrophe-linked note issuances following discovery of the error in the application of criteria. The rating actions are as follows: -Class A USD150 million floating-rate catastrophe-linked capital-at-risk notes due August 11, 2020 downgraded to 'C' from 'AAA' and withdrawn (ISIN XS1654184842) -Class B USD100 million floating-rate catastrophe-linked capital-at-risk notes due December 20, 2019 downgraded to 'B' from 'AAA' and withdrawn (ISIN XS1654183364) -Class C USD110 million floating-rate catastrophe-linked capital-at-risk notes due December 20, 2019 downgraded to 'B+' from 'AAA' and withdrawn (ISIN XS1654184099) KEY RATING DRIVERS Fitch identified an error in the application of criteria with respect to the three classes of catastrophe-linked notes. The catastrophe-linked notes were initially rated using only Fitch's Supranationals Rating Criteria, which aligns the credit quality of the issuer with that of its senior unsecured bond issues, typically resulting in the issuer's Long-Term Foreign-Currency IDR being assigned to such issues. Fitch identified that the original 'AAA' ratings of the catastrophe-linked notes were not reflective of their insurance-linked characteristics, which can involve a principal reduction, and that they had been rated based on an assumption that their credit quality was aligned with that of IBRD. In actuality, the credit quality of the rated catastrophe-linked notes is primarily linked to the defined risk of various natural catastrophes, similar to that of catastrophe bonds issued by a special-purpose vehicle that is sponsored by an insurance or reinsurance company. Such risk should be assessed using Fitch's ILS Criteria, which was not applied when Fitch originally rated the catastrophe-linked notes. To correct its rating analysis to reflect the natural catastrophe risk, Fitch used a combination of the two rating criteria. First, Fitch assessed the catastrophe-linked notes under its ILS Criteria. These criteria serve as the primary driver of the rating changes. In addition, although these catastrophe-linked notes are not guaranteed by IBRD, they are directly issued by IBRD. Accordingly, the agency also continued to consider its Supranationals Rating Criteria. Fitch applied the lower of the ratings implied by these two rating criteria in the corrected analysis. In each case, therefore, Fitch's ILS Criteria drove the corrected rating outcome. The class A catastrophe-linked notes are exposed to Mexico earthquake risk. According to a press release by the Mexican government, the 8.1 magnitude earthquake that occurred on September 7 constituted an applicable event and a 100% principal reduction will apply. The calculation agent determined this principal reduction on the calculation date of October 9, 2017. After five business days as of October 16, 2017, this principal reduction becomes final and binding. The principal reduction will be effective on November 13, 2017. As a result, the catastrophe-linked notes meet Fitch's ILS Criteria for a default. As default is imminent, Fitch downgraded the catastrophe-linked notes to 'C' following its corrected analysis. The modelled exceedance probability of the class B notes was originally evaluated at 7.97%, which implies a 'B' rating under Fitch's ILS Criteria. The class C catastrophe-linked notes have an originally modelled exceedance probability of 5.80%, which implies a rating of 'B+'. This was the basis for the ratings assigned to these catastrophe-linked notes following Fitch's corrected analysis. These B and C classes of catastrophe-linked notes are exposed to Atlantic and Pacific storm events, respectively, and Fitch is unaware of any events that have potentially triggered losses. Fitch has withdrawn the ratings of the class A, B and C catastrophe-linked notes as the agency does not expect to have access to sufficient information to allow it to effectively monitor the ratings on an ongoing and timely basis, nor to allow the agency to fully apply its ILS Criteria. CRITERIA VARIATION Fitch's analysis incorporated a criteria variation from the ILS Criteria, which is described below. Fitch does not have access to information normally evaluated under its ILS Criteria, including, but not limited to, the underlying retrocession agreement and various legal opinions. Thus, such information was not reviewed as part of Fitch's corrected rating analysis. However, Fitch recognizes that in most cases, the key driver of a rating for a catastrophe bond when applying the ILS Criteria is based on the probability of loss exceedance as computed by catastrophic modelling experts. Such information from modelling firm, AIR Worldwide Corporation, is currently available to Fitch via the prospectus. The criteria variation applied by Fitch was to base its corrected rating analysis on a narrow application of its ILS Criteria to consider only modelled results, rather than other aspects of the analysis defined in the ILS Criteria. Fitch applies this criteria variation only in its corrected rating analysis for these rating actions, and will not apply it on an ongoing basis, which has in turn prompted the rating withdrawals. Contact: Primary Analyst Vincent Martin Director +44 203 530 1828 Fitch Ratings Ltd 30 North Colonnade Canary Wharf London E14 5GN Secondary Analyst Theresa Paiz Fredel Senior Director +1 212-908-0534 Committee Chairperson Keith Buckley Managing Director +1 312 368 3211 Sources of information - Bond issuance prospectus Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com; Hannah James, New York, Tel: + 1 646 582 4947, Email: hannah.james@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Insurance-Linked Securities Rating Criteria (pub. 29 Jun 2017) here Supranationals Rating Criteria (pub. 18 May 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. 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