Time is very short. I’ll update this post with further analysis later.
We’ll begin with this story via Reuters:
A catastrophe bond sold by U.S. insurer Allstate Corp (ALL.N) is in default after special purpose vehicle Willow Re failed to make in full an interest payment that fell due last week.
The transaction is among four catastrophe bonds guaranteed by a unit of Lehman Brothers that were downgraded by credit rating agency Standard & Poor’s following the U.S. investment bank’s Sept. 15 bankruptcy filing.
Allstate confirmed late on Monday that Willow Re had not made the payment, due Feb. 2, within the five-day grace period.
“Last week, Willow Re paid approximately 91 percent of the interest due on the bond,” said spokeswoman Maria Gemskie.
“Allstate continues to meet its obligations under its reinsurance agreement with Willow Re. The default of Willow Re does not create any contractual obligations for Allstate.”
The $250 million bond, which matures in June 2010, was sold two years ago to provide Allstate, the largest publicly listed U.S. home and auto insurer, with protection against losses from windstorms in the northeastern United States.
S&P had already cut Willow Re’s Class B 2007-1 notes from CC to D — its lowest rating — on Jan. 30, saying the issuer had given notice it would not have sufficient funds to make the scheduled payment. It said assets held in the collateral account were not generating enough income to cover the interest due.
Willow Re and three similar deals used a unit of Lehman Brothers as total return swap counterparty, contracted to ensure the collateral backing the bonds was sufficient to meet interest and principal repayments, and to make up any shortfall.
When it collapsed, investors were left with direct exposure to market losses on assets held as collateral. S&P had said on Oct. 9 that it believed payments on Willow Re were at risk.
The default will not trigger a termination of the underlying reinsurance agreement between Allstate and Willow Re, meaning the bonds could still pay out to Allstate in the event of a severe windstorm in the northeastern United States. In that case, the exact payment received by the insurer would depend on the value of the collateral pool.