Mexico Issues Catastrophe Bonds
June 1, 2006, Latin Lawyer

This month Mexico became the first Latin American nation to take protective action in case of a major earthquake by forming a special purpose vehicle to issue catastrophe bonds. Global law firm White & Case advised the Mexican government.

"Working on this deal was very exciting for us," says Howard Kleinman, a securities partner at White & Case in New York. "It's a unique product in the region, but one that provides good protection for governments. Public finances do not need to be so reliant on insurers, and more money can be freed up for social spending."

The special purpose vehicle was set up by the European Finance Reinsurance Company Ltd., a subsidiary of Swiss Reinsurance Co., to issue $160 million worth of bonds, which will mature in 2009, and pay a good rate of interest (Libor plus 2.35 per cent). However, the deal wasn't without challenges.

"Combining the interests of the government and the investors, and merging the documentation for insurance and a bond sale was interesting," says Kleinman. "Having good capital markets and insurance practices in New York and regulatory and finance capability in Mexico was key."

According to Kleinman, other nations in the region are likely to follow suit.

"There's definitely interest in the rest of the region - its very likely that other governments will follow Mexico's lead," he says. "Particularly as other countries improve their credit rating, they will increasingly see these bonds as a way to lower insurance premiums."

Even within Mexico, the bonds could diversify, extending to other natural disasters. "The government could look at hurricane protection - although that might be more pricey than for earthquakes," says Kleinman.

Working with Kleinman were David Koschik, Richard Liskov and Terry O'Brien in White & Case's New York office, and Rodrigo Orozco Waters and Eduardo Flores-Herrera in the Firm's Mexico office.