Mexico quake seen triggering US$150mn Cat bond

The massive earthquake that struck southern Mexico on September 7 should trigger a World Bank-supported cat bond for as much as US$150mn, according to experts.

The temblor occurred just one month after the World Bank issued a US$360mn IRBD/FONDEN 2017 catastrophe bond to Mexico, designed to assist against losses from earthquakes and tropical cyclones; however, the bank has yet to declare a determination on the matter.

"Being magnitude 8.1, it looks as if a payout may be due, if the location is accurate and intensity unchanged, but it's very difficult to say definitively whether that will be the case, or how much of the principal of the Class A tranche of notes is at risk of paying out," said Steve Evans of cat risk news outlet Artemis.bm.

Evans added that the trigger for any payout is a parametric arrangement, with the cat bond paying out if an earthquake of a certain magnitude or higher occurs within the parametric boxes. A 25%, 50%, 75% and 100% payout of principal is possible, depending on the location and intensity of an earthquake.

In a later update, Evans added, "Market sources suggest that there is a good chance that the FONDEN 2017 catastrophe bond Class A notes are set to become a total loss."

"The parametric box that it appears the quake struck in would result in an 8.1 quake being a 100% loss of principal. If the magnitude was revised down to 8.0 it would be 50% we understand," he said.

While the US Geological Survey determined the quake was an 8.1 on the Richter scale, Mexico's own seismological service gave the event a final rating of 8.2.

In a note to its investors, Plenum Investments concluded a 100% loss triggering a full payout. Noting the size of the quake, the firm said, "We are therefore currently expecting a total loss of the bond."

(Pictured: A man rides his motorbike in Juchitan de Zaragoza, state of Oaxaca, after the earthquake)