Cutting credit

Weaknesses in the structural make-up of catastrophe bonds, exposed by Lehman Brothers' collapse, have prompted issuers to introduce a series of updates to the asset class aimed at de-correlating insurance risk from credit risk. Hardeep Dhillon reports


Confidence is returning to the catastrophe bond market. A set of structural enhancements and measures to increase transparency have alleviated investor concerns and led to strong primary issuance. Those concerns had centred on the bankruptcy of Lehman Brothers, which exposed weaknesses in the total return swap (TRS) counterparty and collateral arrangements. Bonds that included Lehman as a counterparty in a TRS suffered downgrades as they failed to meet interest and principal repayments.

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