Florida Cat Fund Preps $1.2B High-Grade Taxable Deal

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BRADENTON, Fla. – The Florida Hurricane Catastrophe Fund plans to sell $1.2 billion of high-grade taxable bonds that an official said will offer muni investors an opportunity to pick up yield in the sweet spot of the curve.

The negotiated FHCF deal could price as early as next week with JPMorgan as the book-runner.

The offering is the first to be issued by the State Board of Administration Finance Corp., a moniker replacing the Florida Hurricane Catastrophe Fund Finance Corp., which state officials found confusing for prospective investors.

The state-run, nonprofit Cat Fund will use bond proceeds as liquidity to make timely payments on insurance claims from damages caused by hurricanes.

Underwriters have been pre-marketing the deal, mistakenly placed on pricing calendars the first week of February, according to Ben Watkins, director of the Florida Division of Bond Finance.

Because of volatility in the Treasury market, the proxy for gauging taxable muni bond pricing, Watkins said the deal could be issued next week, although the decision when to price it will be based on day-to-day market conditions.

The fixed-rate borrowing is expected to be structured with bullet maturities in 2019 and 2021.

The bonds can be called at any time, in whole or in part, and have make-whole provisions.

Pledged collateral for the debt includes $1.2 billion in annual premiums, investment earnings, and assessments that can be charged on 28 lines of property and casualty insurance policies in the state, including automobile and homeowner's policies.

Currently, no assessments are being levied.

The bonds are rated AA by Standard & Poor's, which upgraded the credit from AA-minus ahead of the deal.

Fitch Ratings affirmed its AA rating, and Moody's Investors Service affirmed its Aa3 rating.

All outlooks are stable.

Watkins said the upgrade by S&P recognizes the financial position of the Cat Fund, now at its healthiest since being created 22 years ago.

The one-notch rating lift by S&P also will help the fund obtain better rates because it is on par with Fitch, and both are higher than Moody's.

Institutional investors will drive pricing, he said.

"I expect there will be a food fight for these bonds among investors since it's a short duration with a high-grade credit with a new name," Watkins said. "Investors are starved for yield, and yet they want to stay short because of concern over what the Fed will do with interest rates."

S&P analyst Sussan S. Corson said that the agency's upgrade reflects consistent growth in the assessment base since 2010, to a "sizable" $39 billion in 2014, and the accumulation of $13.8 billion in cash reserves reducing the need for additional debt issuance to cover the fund's maximum contractual liability in the event of a storm during the 2016 hurricane season.

The FHCF's potential liability for payments totals $17 billion.

If needed to pay claims, the Cat Fund will have a total of $16.5 billion in liquidity from its $13.8 billion fund balance, and proceeds of the 2016 bonds as well as $2 billion of bonds issued in 2013.

The 2013 taxable deal with maturities in 2016, 2018 and 2020 received more than $3.6 billion in orders from a record 139 buyers.

It also achieved a blended rate of 2.61%, which was significantly better than had been estimated, Watkins said at the time.

The 2013 Cat Fund deal was the single-largest taxable municipal bond transaction until the Port Authority of New York and New Jersey tied it with a $2 billion deal in October 2015, according to Thomson Reuters.

With Treasury rates higher on the long end and compressed credit spreads, Watkins said Tuesday that he expects to see greater demand and better pricing now than three years ago.

The Florida Hurricane Catastrophe Fund was created in November 1993 during a special legislative session.

Florida lawmakers created the fund to stabilize the state's property insurance market after the devastating Hurricane Andrew in 1992, which forced some private insurers out of business and led others to leave the state because of the risk.

The Cat Fund acts like a reinsurer, providing coverage at below-market rates to private companies and the state-run Citizens Property Insurance Corp. Participation in the fund is mandatory.

Today, 157 companies offering property insurance in Florida participate in the Cat Fund, including Citizens Property Insurance.

In 2015, the fund collected $10.2 billion in premiums representing $2.1 trillion of property insured by 6.5 million customers.

Since its inception, the FHCF has paid more than $9.7 billion in reimbursements to insurers.

Most of the claims were the result of the unprecedented eight major hurricanes that struck the state in 2004 and 2005.

Florida has been hurricane-free for the past decade, leaving the Cat Fund in its best financial position ever.

"I'm extremely pleased with how the FHCF settled claims in 2004 and 2005 and to be a part of that massive effort," said Jack Nicholson, the fund's director, who is retiring at the end of February.

"We paid around $9.6 billion in loss settlements to participating insurers and generally responded in two to five days after receiving a loss reimbursement request unless bond proceeds were required to be liquidated which added about a week," he said. "This proved that the FHCF would not only work but would work well."

Since 2006, the FHCF has completed six bond issues totaling $10.9 billion, according to the fund's financial advisor, Raymond James & Associates Inc.

Those offerings consisted of three tax‐exempt issues totaling $2.6 billion and three taxable issues totaling $8.3 billion.

No tax-exempt bonds are outstanding as the final maturities were defeased early in July 2014.

The FHCF is a tax-exempt state trust fund governed by the State Board of Administration.

The fund can issue tax-exempt bonds, supported by a private-letter ruling from the Internal Revenue Service, although tax-exempt debt can only be used to pay claims after a hurricane hits.

To use debt as liquidity in advance of a hurricane strike, or pre-event bonds, the fund must issue taxable debt.

The Cat Fund's obligations are not the insurance-linked, taxable-catastrophe bonds that are issued by private companies.

In addition to JPMorgan, the syndicate for the upcoming issue consists of Bank of America-Merrill Lynch, Citi, Morgan Stanley, and Wells Fargo Securities.

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

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