Multicat Mexico C

Solidum has again profited from trading in distressed Cat Bonds, this time it was the Multicat Mexico C tranche. Through superior and timelier knowledge Solidum was able to purchase a few million of the notes at 20 cents for them to increase in value to close to 50 cents after a few hours, ultimately maturing at 50 cents shortly thereafter.

The Multicat Mexico Cat Bond was a bond exposed to Pacific Hurricane on a parametric basis. The loss pay-out on the bonds was structure to be triggered should the barometric pressure within a defined polygon (geographic area) be less than or equal to 932 mBar for a 50% loss and less than or equal to 920 mBar for a 100% loss of the collateral. The barometric pressure figures used were to be taken from the final track data provided by the National Hurricane Centre (NHC) at the National Oceanic and Atmospheric Administration (NOAA). Linear interpolation between the final track data points was to be used to assess the barometric pressure within the polygon.

Hurricane Patricia formed on 20 October 2015 and its intensity exploded on 22 October growing Patricia from a tropical storm to a Category 5 hurricane within 24 hours. It reached its peak intensity on 23 October with maximum sustained winds of 345 km/h, making it the most intense tropical cyclone ever in the western hemisphere and the strongest ever in terms of 1-minute maximum sustained winds. These wind speeds were accompanied by a minimum central pressure of 872 mbar.

When the early data from the NHC was analysed together with the Cat Bond structure it appeared to show a total loss and correspondingly the notes reduced to a close to zero value once future premium and extension premium payments were taken into account.

After a few weeks a further report came to light from iCyclone hurricane chasers. Whereas the bond-critical NHC wind speed and barometric pressures around came from satellite measuring, a less accurate way to measure than direct measurement, iCyclone had 2 measuring devices less than a quarter of a mile away from where the eye made landfall. Both measurements showed higher barometric pressure than the NHC and (a) dependant on whether the NHC took this data as relevant / acceptable; and (b) how they used this data to modify their own data points, this could result in a 50% loss in comparison to a 100% loss.

With this new data trading on the notes pushed the price to 20 cents. At that time Solidum felt that there remained too much uncertainty to justify paying 20 cents.

Solidum therefore put in place a plan to try to be first with the knowledge on the final figures once published so we would maybe have a chance to trade on the notes before the rest of the market knew the final data.

On 4 February we became aware that the NHC had published their report within seconds of it being available. We then analysed the figures in a pre-built model. After some checking and double-checking we searched the market for offers.

We found an offer for 20 cents and immediately purchased these. Within an hour the market was aware of the new data and our window was closed. The notes increased in value immediately on the secondary market to close to 50 cents, netting the Solidum Funds a 250% return. This was a risk-free return, similar to a pure arbitrage transaction – to coin a famous car advertisement: Solidum hat Vorsprung durch Technik.