New York’s Metropolitan Transportation Authority is heading in the right direction with its move to issue storm-surge catastrophe bonds, according to a hurricane financing expert.
Video: Hardening New York City
“They recognize the need to do it and that jumps out right in front of you,” said Alan Rubin, a government-relations specialist at law firm Cozen O’Connor in New York. “They built their risk around scientific data as opposed to ‘one every 100 years.’”
Standard & Poor’s last week assigned a preliminary BB-(sf) rating to the Series 2013-1 Class A notes, expected to total around $125 million, to provide parametric coverage for storm surge measured during the event period of a named storm.
S&P said it marks the first time it has rated a transaction using only the storm-surge model by Risk Management Solutions Inc., the calculation agent for the deal.
Backing the deal, whose expected term is three years, is a reinsurance agreement between the issuer, MetroCat, and the ceding insurer, the MTA’s First Mutual Transportation Assurance Co. GC Securities and Goldman, Sachs & Co, is co-senior manager. The two are joint restructuring agents.
“I like how they’re using a storm-surge model instead of a wind model. That’s the smart thing to do,” Rubin said in an interview. “In Florida and Louisiana, you can base it on wind. But look at Sandy,” he said of the hurricane that hit New York on Oct. 29, causing $4.8 million of damage to the MTA, which serves the city’s public transit riders.
“Winds from Sandy never hit more than 81 miles per hour, but the storm surge was off the charts. Here, the problem is more water surge. You don’t get 300 mile-per-hour winds in midtown Manhattan. You use a different calculus south of the Mason-Dixon line.”
Federal, state and local officials called Rubin the “hurricane czar” for his work in Miami-Dade County, Fla., after Hurricane Andrew struck that region in 1992, causing more than $30 billion in damage. While working in Lehman Brothers’ investment banking division, Rubin helped design and underwrite the catastrophe fund for hurricane relief.
An MTA official, citing advice from counsel, said the authority could not comment on the catastrophe bonds.
Speaking generally, however, chairman and chief executive Thomas Prendergast cited the need to recognize climate change. “Two hurricanes in two years tell you that something is happening on a climactic front,” Prendergast told reporters Monday in a briefing about the MTA’s budget and four-year financial plan, which the agency will formally introduce to its board on Wednesday.
The MTA, one of the most active municipal issuers with $31 billion of debt, has asked the board to include $5.8 billion in its capital program for “mitigation” work, intended to harden the system from storm damage. Agency finance officials expect up to 90% reimbursement from the federal government and insurers.
Rubin, who called the cat bonds “the first of many,” said banks are crafting more creative transactions. “There are creative deals done by some other houses,” he said, citing JPMorgan Chase and Morgan Stanley.
Rubin also suggested future deals include non-named storms. “You can receive similar damage from a non-named storm as from a named storm,” he said, pointing to some nor’easters that the National Weather Service has downgraded from a hurricane.