By Paul A. Harris
St. Louis, July 28 - Shackleton Re Ltd. priced an upsized $125 million issue of 18-month principal-at-risk variable-rate risk linked securities (Ba3/BB) linked to California earthquakes on Thursday night, according to an informed source.
The notes priced at par to yield three-month Libor plus 800 basis points.
The yield came on top of the price talk.
Goldman Sachs & Co. ran the books for the Rule 144A notes.
The issue was upsized from $75 million.
Shackleton Re is a special-purpose vehicle serving as a trust engaged with ceding reinsurer Endurance Specialty Insurance Ltd.
The informed source said the deal had been well oversubscribed and added that diverse accounts had been in the deal.
These, the source added, included historic catastrophe bond players as well as new accounts that have taken an interest in catastrophe securities, and high-quality money managers who were looking to pick up some extra yield.
The source added that spreads on catastrophe bonds are probably at historic highs because of the catastrophic hurricanes of 2005, including hurricanes Katrina and Wilma, which prompted the reinsurance market to price in additional premiums.
The source explained that even though the California earthquake bonds do not entail any risk with regard to U.S. hurricanes, nevertheless the hurricanes of 2005 have impacted the entire catastrophe bond market, even causing earthquake risk premiums to increase.
When Prospect News inquired as to the potential for future growth in the catastrophe bond market, the source said that investors seem to be becoming increasingly comfortable with the securities.
As more and more issues price, there are better comparables, and people get a better feeling for where risk is trading, the source added.
The secondary market has seen higher volumes. The securities are becoming a bit more liquid.
With liquidity and more historical performance, some accounts that may have shied away in the early years are starting to become more comfortable.
| Issuer: | Shackleton Re Ltd.
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| Amount: | $125 million
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| Maturity: | Feb. 7, 2008, extendible in three month intervals for loss development
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| Security description: | Principal-at-risk variable-rate risk linked securities
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| Covered peril: | California earthquake
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| Risk period end date: | Jan. 31, 2008
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| Bookrunner: | Goldman Sachs & Co.
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| Coupon: | Three-month Libor plus 800 bps
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| Price: | Par
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| Yield: | Three-month Libor plus 800 bps
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| Extension event spread: | Level I: 30 bps
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| Level II: 10 bps
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| Level III: 300 bps (See note)
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| Maximum extension: | Until Jan. 31, 2010
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| Trade date: | July 27
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| Settlement date: | Aug. 1
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| Ratings: | Moody's: Ba3
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| Standard & Poor's: BB
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| Distribution: | Rule 144A
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| Price talk: | Libor plus 800 bps
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| Note: There are three levels of extension events corresponding to different circumstances that would allow Shackleton or Endurance to extend the maturity of the notes.
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| The highest compensation level, Libor plus 300 bps, occurs when the company chooses to extend the maturity without an apparent reason for doing so.
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| The second highest compensation, Libor plus 30 bps, could take effect for an event that occurs late in the term of the bonds. The company can extend the bonds in order to develop loss estimates.
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| The lowest compensation, Libor plus 10 bps, takes effect for an event that is certain to generate a loss, in which the company merely needs to calculate the extent of the loss.
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| The company can extend until Jan. 31, 2010, but the bondholder is only at risk for principal loss for events which occur during the risk period, which is 18 months.
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