Slabbed finds Ajax’s Achilles Heel: Rock Mountain High or Just Stoned in Bermuda?

Special thanks to Chris Sposato. If memory serves there were a dirty (half) dozen “guaranteed” Cat Bond issues connected to Lehman. The second to come tumbling down belongs to Bermuda based Aspen Insurance Holdings, Ltd. and their special purpose entity Ajax Re Ltd. The associated ri$k to take a hit is covered earthquake damage in California. The story itself begs additional research as this deal sounds as if there might be Cat Bonds stuck inside Cat Bonds with a (subprime) Mortgage Backed Security twist. The list of players per the article is very convoluted as well.  The Royal Gazette has the Bloomberg story:

Ajax Re Ltd., a catastrophe bond sold by Bermuda-based Aspen Insurance Holdings Ltd., is likely to default on an interest payment this month, Standard & Poor’s said, the second such security hurt by Lehman Brothers Holdings Inc.’s collapse.

S&P said it may downgrade $100 million of debt issued through Ajax Re Ltd. to D, the lowest grade, from CC, citing an “imminent interest payment default”, according to a statement from the New York-based ratings company yesterday.

Aspen sold the bonds in 2007 to protect against claims from Californian earthquakes.

“The issuer has notified us that it will not have sufficient funds available in the collateral payment account to make the scheduled interest payment,” S&P said. “We anticipate the transaction will default.”

The Ajax Re notes are one of four cat bonds that used contracts sold by Lehman Brothers Holdings Inc to guarantee returns on securities backing the notes. Lehman’s collapse in September nullified the cover, leaving the bonds reliant on the collateral to make interest and principal payments.

“Aspen is aware of the notice issued by Ajax Re regarding insufficient funds to meet the March interest payment,” Aspen said in an e-mailed statement yesterday. “Aspen has been aware of this potential issue as a result of Lehman Brothers’ bankruptcy and the ongoing discussions between Ajax Re and its noteholders regarding this.”

Ajax must pay interest on March 16, and has a five-day grace period before a default, S&P said.

Allstate Corp.’s Willow Re Ltd., failed to make a full interest payment last month as a result of Lehman’s collapse.

Insurers and reinsurers sell cat bonds to reduce the risk of claims that could erase profits or threaten their solvency. The only cat-bond default occurred after Hurricane Katrina struck New Orleans in 2005.

Property damages exceeded the threshold that entitled Zurich Financial Services AG to keep investor funds for the Kamp Re cat bond it sold earlier that year.

The Ajax Re bonds promise to pay back principal and interest of 625 basis points more than the Libor interbank rate unless an earthquake increases claims in California. A basis point is 0.01 percentage point.

While no earthquakes have occurred, the assets held by Ajax Re, named after the suicidal Greek warrior from Homer’s Iliad, turned into dead money for investors because of an investment trail that ends with the same sort of sub-prime mortgages that led to $980 billion of write-downs and losses at the world’s biggest financial institutions since the start of 2007.

The debt became “a significant issue” following Lehman’s bankruptcy, S&P credit analyst Cameron Heath said in a September 30 report. S&P cut its rating on Ajax Re by eight grades to CC, two steps above default.

Ajax Re’s collateral, which was guaranteed by Lehman, was worth “substantially less” last month than $100 million, Aspen Insurance said in a November 10 regulatory filing. Ajax invested in bonds sold by another insurance company, called Ballantyne Re Plc, which were offered by Bermuda-based Scottish Re Group Ltd.

Brandon Ashcraft, a New York-based spokesman at Barclays Plc, which bought Lehman’s North American investment-banking business, declined to comment.

Ballantyne Re bonds have been cut to as low as C by Moody’s Investors Service, the firm’s lowest grade, because it invested in mortgage-backed securities, including subprime debt. Moody’s said last August that there was a “high probability” that losses on the mortgage bonds will cause some Ballantyne Re bonds to default.

The Ballantyne Re bonds that Ajax Re holds are guaranteed by bond insurers Ambac Assurance UK Ltd. and Assured Guaranty (UK) Ltd., according to an Aspen Insurance investor presentation in December.

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