Hedge Funds Facing Default on $100M Mexican Catastrophe Bond Due To Hurricane Patricia

Oct 26 2015 | 3:56pm ET

(Reuters) - Traders are anticipating a likely default of a $100 million catastrophe bond issued on behalf of the Mexican government, as a result of Hurricane Patricia, they said on Monday.

The default - of either 50 or 100 percent of the bond, depending on the strength of the hurricane - would mark one of the largest catastrophe bond losses for investors since the Japanese earthquake and tsunami of 2011, they added.

"Everyone is expressing a degree of caution, but they will be thinking the bond is gone - it's toast," said one broker.

Investors who buy a catastrophe bond enjoy a high yield but lose the value of the bond if a pre-determined catastrophe is triggered.

A default would benefit Mexico's natural disaster fund, helping with the cost of the hurricane, which hit the country last weekend.

Default or otherwise will be declared within the next 30 days by risk modeller AIR, based on National Hurricane Center data, the broker added. AIR could not be immediately reached for comment.

Roman Muraviev, head of catastrophe bonds at fund manager Twelve Capital, said traders had marked the bond as low as 0-10 cents on Friday in expectation of a default. Little trade had been seen in the bond on Monday, the broker said.

The catastrophe bond market has grown rapidly in the past few years, attracting hedge funds and institutional investors, because of its high yields, low default rates and low correlation with global markets. A record $8 billion in catastrophe bonds were issued last year.

The bond was sponsored by Swiss Re, according to specialist website Artemis. Swiss Re declined to comment.


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