Regional News

Florida's Cat Fund Sets $625M Sale

BRADENTON, Fla. - As the Florida Hurricane Catastrophe Fund Finance Corp. prepares to price $625 million of tax-exempt revenue bonds, the state-run nonprofit agency also is negotiating a $4 billion liquidity deal with Berkshire Hathaway Inc.

The Cat Fund expects to offer the $625 million fixed-rate deal next week but the sale is on a day-to-day schedule, according to Ben Watkins, director of the Florida Division of Bond Finance and a member of the Cat Fund Finance Corp. board.

"We could sell any day but would like to have the pricing completed by the end of next week so we can close the week thereafter," Watkins said. "All this is subject to market conditions."

Bond proceeds will be used to pay new and reopened claims from hurricanes that hit the state in 2005.

Citi is the book-runner of a 17-member syndicate selling the bonds, which carry double-A ratings and will not be insured.

"With strong ratings insurance is not cost-effective," Watkins said.

The Series 2008A transaction is structured to wrap around the Cat Fund's first tax-exempt deal with bullet maturities in 2013 and 2014.

The agency first sold $1.35 billion of Series 2006A tax-exempt revenue bonds - which were not callable and had maturities from 2008 to 2012 - to pay the known claims from hurricane damages the year before. Since that issuance, there have been new and reopened claims.

Like the 2006A bonds, the 2008A bonds will be repaid primarily with emergency assessments on almost all property and casualty insurance policies in Florida, including all homeowner, vehicle, fire, burglary, and theft policies. The same 1% emergency assessment on policies, previously scheduled to end in 2012 with the final maturity of the 2006A bonds, now will be extended to match the 2014 maturity of the 2008A bonds.

"The plan of finance is conservative in that we're keeping it short ... and adding it to the structure already in place," Watkins told investors in a conference call on Monday.

The assessment base, which only excludes accident and health, workers compensation, and medical malpractice, averaged an annual growth rate of 8.1% over the last 17 years to $36.65 billion in 2007. The broad assessment base is the primary factor considered by rating agencies.

The 2008A bonds were rated AA-minus by Fitch Ratings and Standard & Poor's and Aa3 by Moody's Investors Service.

The Cat Fund was created by Florida in 1993 in response to the private property insurance crisis resulting from Hurricane Andrew hitting South Florida a year earlier. It was designed to help private insurers with catastrophic losses and stabilize the availability of property insurance throughout the state.

While the Cat Fund acts like a reinsurer, its advantage over private companies is its ability to issue tax-exempt debt to pay claims. It also has a strong non-impairment pledge from the state, another credit plus for rating analysts.

Insurers are required to participate in the Cat Fund and can select various reimbursement levels, which don't kick in until they reach a certain co-payment amount. A storm causing residential insured losses of over $15 billion would be required before any bonding would be needed, according to a June 15 analysis by Raymond James & Associates Inc., the Cat Fund's financial adviser.

However, the Cat Fund's increasing liabilities concern rating analysts. In recent years, the Legislature allowed new levels of coverage in an attempt to get property insurance premiums lower for constituents. While premiums did not come down as lawmakers had hoped, the Cat Fund's potential liability to pay claims for the 2008 hurricane season is up to $27.99 billion and its multiple-year bonding capacity is $46.4 billion.

In addition, there are other state-created agencies that can tap the same insurance assessment base as the Cat Fund and issue tax-exempt bonds to pay insurance claims.

The increasing liability and volatility of the financial markets in the past year, along with concern about the available bonding capacity, led Cat Fund officials to investigate various liquidity products in order to have quick access to cash and bonding capacity should a major storm or storms impact the state.

On July 2, the State Board of Administration, made up of Florida's top three elected officials - Gov. Charlie Crist, Chief Financial Officer Alex Sink, and Attorney General Bill McCollum - authorized Cat Fund officials to negotiate a put option with Berkshire Hathaway Inc. or an affiliate.

Under preliminary terms of the put option, the Cat Fund would pay Berkshire $224 million. If the Cat Fund needs to issue debt, Berkshire would guarantee purchasing up to $4 billion of 30-year of tax-exempt bonds at an interest rate of 6.5%. The bonds would be callable at 10 years. The put option would be effective until May 2009.

A spokesman for Berkshire declined to comment about the put option.

Final terms of the put option were still being negotiated, and the contract had not been signed, SBA spokesman Dennis MacKee said on Monday.

According to an analysis by Raymond James and members of the Cat Fund's finance team, reinsurance is another option the agency can consider. Compared to the Berkshire put option, approximately $5 billion of reinsurance would cost approximately $1.2 billion, according to their analysis.

Co-senior managers on the 2008A revenue bond sale next week are Citi, Goldman, Sachs & Co., JPMorgan, and Lehman Brothers.

Co-managers are Banc of America LLC, BB&T Capital Markets, Depfa First Albany Securities LLC, Loop Capital Markets LLC, Merrill Lynch & Co., Morgan Keegan & Co., Morgan Stanley, M.R. Beal & Co., Ramirez & Co., RBC Capital Markets, Siebert Brandford Shank & Co., SunTrust Robinson Humphrey, and Wachovia Bank NA.

Nabors, Giblin & Nickerson PA is bond counsel while Bryant Miller Olive PA is disclosure counsel. Greenberg Traurig PA is underwriters' counsel.



Upcoming Events

Already a subscriber? Log in here
Please note you must now log in with your email address and password.