BRADENTON, Fla. - The Florida Hurricane Catastrophe Fund expects to return to the municipal bond market next week after a nearly three-year hiatus to sell $2 billion of high-grade taxable bonds with maturities a market expert said should entice the sector's growing investor base.
The state-run, nonprofit FHCF will use bond proceeds as "pre-event" liquidity to make timely payments for reinsurance claims related to hurricane losses, if needed during this year's tropical storm season. The season typically runs from June through November.
The double-A rated, fixed-rate taxable bonds will be structured with three, five, and seven-year maturities.
The debt is subject to optional redemption with a make-whole call provision, a feature that is more conventional in the taxable sector, according to Ben Watkins, director of the Florida Division of Bond Finance.
The negotiated deal, to be sold with Barclays Capital as the book-runner of a 15-member syndicate, has an "underlying municipal credit structure that is very straightforward," said Watkins, who added that he expects a low cost of borrowing due to the current "very attractive interest rate environment."
"We expect a good reception," he said.
The deal is expected to be sold largely to institutional investors such as large mutual funds and money managers.
A trader specializing in taxable munis said the maturities should be very attractive to investors, and the plain vanilla, high-grade structure of the deal should spark "a lot of demand."
Spreads for each maturity in the Hurricane Catastrophe Fund's deal should be wider than a comparable, double-A rated, taxable water and sewer deal due to the "inherent risk" that the Fund's name suggests plus the fact that the deal is coming from the insurance sector, the trader said.
One of the biggest challenges of marketing Cat Fund deals is getting people to understand the credit fundamentals, which are not "insurance centric," said Watkins.
"It is truly a double-A, tax-backed credit," he said.
The bonds are rated AA by Fitch Ratings, Aa3 by Moody's Investors Service, and AA-minus by Standard & Poor's.
All three agencies place stable outlooks on the fund, and affirmed their ratings on its $1.3 billion of outstanding debt.
Analysts said the agency's strong credit structure and bondholder protection as well as a broad base to levy assessments to secure debt are among the key underlying factors supporting their ratings.
The FHCF's purpose is to provide a type of reinsurance at one-half to one-third of the cost of private reinsurance to help stabilize the property insurance market in Florida, prospective investors were told in a recent Internet roadshow presentation about the forthcoming transaction.
Property insurers in the state, including the state-run, nonprofit Citizens Property Insurance Corp., are required to participate in the Cat Fund. Their residential premiums total about $1.3 billion last year, which represents about $2.1 trillion of insured property value.
The fund has limited liability due to its actual claims-paying capacity, which includes cash on hand and the ability to issue revenue bonds currently capped at $17 billion.
In aggregate, participating insurers must pay $17.2 billion of their own claims before they can trigger the Cat Fund coverage. Then each company must provide a co-pay of about 10% to receive partial reimbursement on losses.
"We've had seven consecutive years without a landfalling hurricane and that has enabled the Florida Hurricane Catastrophe Fund to accumulate approximately $9.8 billion" in its fund balance, said Ash Williams, director of the State Board of Administration, during the roadshow. The SBA oversees the FHCF.
"We would draw on the fund balance prior to the proceeds of the 2013 bonds," Williams said.
If the Cat Fund reached its potential reimbursement obligation of $17 billion this year, the fund would pay claims from its fund balance, the 2013 bond proceeds, and the issuance of additional bonds up to $5.2 billion. If bonds are issued following a hurricane, the Cat Fund could issue tax-exempt or taxable debt.
The fund is structured as a municipal credit with a "strong statutory and indenture protection for bondholders," according to Moody's analyst Lisa Heller.
Those protections include a non-impairment covenant by state, a 1.25 times additional bonds test, and a 1.25 times coverage ratio that requires additional revenues to be collected from premiums or emergency assessments if coverage falls below 1.25 times, Heller said.
The agency is also prohibited by state law from filing for bankruptcy.
While the Cat Fund expects to pay debt service from its fund balance, premiums, and the 2013 bond proceeds if necessary, it can also levy assessments to pay debt service on all property and casualty insurance policies except worker's compensation, accident and health, and medical malpractice insurance premiums.
The assessment base that the Cat Fund can tap totaled $35.6 billion in 2012, and is "tantamount to a tax on insurance premiums," according to Watkins.
Standard & Poor's analyst Robin Prunty said her agency's AA-minus rating and its outlook reflect the statewide assessment base that supports the fund's debt.
"The stable outlook reflects what we view as the sizable resources available to fund bonds outstanding and a significant emergency assessment base that secures the bonds," Prunty said.
S&P also said its rating is not directly tied to the state's rating, though its overall credit profile is a significant factor.
"We do not expect to raise the rating in the two-year outlook horizon due to the potential for significant additional debt if hurricanes were to make landfall in Florida," Prunty said.
The Florida Hurricane Catastrophe Fund was created in November 1993 during a special legislative session after Hurricane Andrew devastated south Florida, and a number of private insurance companies became insolvent or left the state.
The tax-exempt fund is designed to protect the state's interest in maintaining insurance capacity by providing reimbursements to insurers for a portion of their catastrophic hurricane losses.
Raymond James & Associates Inc. is the FHCF's financial advisor.
Along with Barclays on next week's offering are Citi, Goldman, Sachs & Co., JPMorgan, Bank of America Merrill Lynch, BB&T Capital Markets, Jefferies & Co., Loop Capital Markets, Morgan Stanley, M.R. Beal & Co., Ramirez & Co., RBC Capital Markets, Siebert Brandford Shank & Co., SunTrust Robinson Humphrey, 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.