BRADENTON, Fla. — On the heels of a rating upgrade, the Florida Hurricane Catastrophe Fund Finance Corp. today plans to complete the pricing of $693 million of tax-exempt revenue bonds.
Proceeds will be used to pay what is hoped to be the final reinsurance claims from four hurricanes that battered the state in 2005.
Fitch Ratings this week upgraded the Cat Fund’s outstanding debt to AA from AA-minus and assigned the new rating to this week’s deal — a notch higher than the Aa3 rating from Moody’s Investors Service and the AA-minus from Standard & Poor’s.
Retail pricing began yesterday on the new issue, the third tranche of bonds to pay insurers’ claims from the 2005 hurricanes. The Cat Fund sold $1.35 billion of revenue bonds in 2006 and $625 million in 2008 to pay claims from 2005.
The non-callable Series 2010A bonds have bullet maturities in 2015 and 2016 with three coupons and $1,000 denominations available to retail investors, said Ben Watkins, director of the Florida Division of Bond Finance.
The deal received $222 million in retail orders yesterday, Watkins said, a level of participation that was “comparable if not better” than previous Cat Fund transactions.
The offering is also supported by strong ratings and maturities in the short part of the curve where there’s a lot of demand, noted Watkins, who said he moved the offering up a week because the “market is good.”
During a regularly scheduled cabinet meeting Tuesday, Florida’s elected chief financial officer, Alex Sink, asked Watkins if the financial crisis in Europe would affect pricing of the Cat Fund bonds, or future bond issues.
“The municipal market was stable even last week with both gyrations in the equity market and with the response to changes in price to Treasury securities,” Watkins said. “I expect the European crisis not to have an impact on the pricing of the bonds or the ability to get the transaction done.”
The debt director went on to say that the U.S. municipal bond market is insulated in many ways from turmoil taking place elsewhere, including the Euro Zone crisis.
“We expect to benefit from the flight-to-quality and also the high credit ratings of the Cat Fund,” he said.
In many respects, today’s offering is plain vanilla with maturities that wrap around the catastrophe insurer’s existing debt, a strategy designed to provide level debt service.
Debt service payments will increase to $365 million a year from $335 million with the current issue.
The bonds will be repaid primarily with a 1.3% assessment on nearly all types of property insurance policies written in Florida. The assessment base was $33.3 billion in 2009.
While the assessment provides debt service coverage of 1.2 times, the Cat Fund has other resources available should they be needed to make payments.
As additional security, bondholders must be paid first after a hurricane before claims are paid, financial adviser John Forney of Raymond James & Associates Inc. said in a recent Internet roadshow presentation to investors. The Cat Fund also is prohibited by law from filing for bankruptcy until all outstanding debt is paid off.
Watkins said he also expects today’s offering to be the final financing for damages related to the 2005 hurricanes.
Quite a number of new and reopened claims were filed in recent years, which became a controversial issue that delayed today’s transaction a few months while studies were done to determine why.
While no inordinate increase in fraud was found, the studies provided broader understanding of recent changes in the insurance market and state laws regarding the filing of property insurance claims.
Until changes in Florida law earlier this year, a policyholder had up to five years to file a new claim after an event or to contest an open claim. And once a claim was reopened, the policyholder got another five years to contest it.
In addition, studies found there has been an explosion in the number of public adjusters in Florida since an unprecedented number of major hurricanes hit the state — four each in 2004 and 2005.
The Legislature in its annual session this year tightened requirements on public adjusters and their allowable compensation, reduced to three the number of years a policyholder has to file for losses, and reduced the amount of coverage available from the Cat Fund.
Fitch said its rating upgrade was the result of new criteria for rating debt issued by state-sponsored property insurers as well as changes in state law that reduced the Cat Fund’s exposure and enhanced its ability to grow its fund balance.
Despite Florida’s inherent risk from hurricanes, Fitch and Moody’s maintained stable outlooks on their ratings for the Cat Fund.
Standard & Poor’s, however, maintained its negative outlook, which is related to the negative outlook the agency assigns to the state’s AAA credit rating due, in part, to the recession.
“While the rating on [the Cat Fund] is not directly tied to our rating on Florida, in our view the state’s overall credit profile is and continues to be a significant factor for the rating,” said a report by analyst Robin Prunty. “If we lowered the rating on Florida, we could lower the rating on this governmental entity, which was created to stabilize the property insurance market in the state.”
The Cat Fund acts as a low-cost reinsurer for property insurance companies but it is a state-run, tax-exempt entity. It was created by the Legislature in 1993, a year after Hurricane Andrew devastated South Florida and when many private-market property insurers became insolvent, stopped writing new policies, or left the state.
JPMorgan is the book-runner for today’s sale while Citi, Barclays Capital, and Goldman, Sachs & Co. are co-senior managers.
Other underwriters participating in the transaction are Bank of America Merrill Lynch, BB&T Capital Markets, Jefferies & Co., Loop Capital Markets LLC, Morgan Keegan & Co., Morgan Stanley, M.R. Beal & Co., Ramirez & Co., RBC Capital Markets, Siebert Brandford Shank & Co., SunTrust Robinson Humphrey Inc., and Wells Fargo Securities.
Nabors, Giblin & Nickerson PA is bond counsel. Bryant Miller Olive PA is disclosure counsel. GrayRobinson PA is underwriters’ counsel.
