Commentaries

Defaults by catastrophe bonds, securities used by insurers to shift the risk of severe losses from natural disasters, have been few and far between.

When deals have run into trouble, it has often been due less hurricanes or earthquakes than some flaw in the way they were structured, such as the four bonds that imploded last year because of their links to Lehman Brothers and dodgy asset-backed debt.

Today Standard & Poor’s downgraded another deal in trouble, Swiss Re’s 252 million euro Crystal Credit transaction. Once again, the problem here is man-made.

This deal is different from most other cat bonds in that it doesn’t reference losses from natural disasters, but is instead tied to the performance of Swiss Re’s credit reinsurance business. Losses on the reinsurance contracts have started to climb as the economy soured. In particular, S&P says, the credit reinsurance business got hit by a “steep increase” in Spanish reinsurance claims.

It’s not the first time these bonds have been downgraded, although things seem to be getting worse. S&P says it’s “most likely” the class C bonds won’t make their principal payments in full at maturity. These were once rated B, and have now fallen to CC. The senior bonds, which were once investment grade, are now B+.