CEA $300M Bond Push Has Federal Cat Hedge

The California Earthquake Authority (CEA) plans to sell $300 million in “pre-event” bonds to boost its claims paying ability in case of a major earthquake that includes a provision allowing it to repay investors in case national catastrophe legislation is passed.

The CEA will issue pre-event revenue bonds later this fall for a par amount of $300 million, according to material released following most recent board meeting. Details of the bonds’ structure – including maturities and pricing – will be determined later, documents say.

The new issuance will replace $315 CEA’s 2006 pre-event bonds currently maturing and will move up the in subordination, according to a CEA memo.

However, unlike the 2006 vintage the new bonds will include a repayment option that would allow the CEA to take advantage of a proposed federal catastrophe borrowing backstop that it has been lobbying in favor for several years.

“After an agreed period (three, four, or five years), the CEA would have the right, without penalty, to fully repay existing bondholders and redeem outstanding bonds at par value (i.e., at the face amount of the bonds), thus clearing the way for CEA’s post-event borrowing under the federally guaranteed facility” a memo detailing the plans say.

For a number of years the CEA has been pushing for legislation that would create federal debt guarantees for state earthquake insurance facilities. In 2011 Senator Barbara Boxer (R-Calif.) sponsored the Earthquake Insurance Affordability Act which would allow the U.S. Treasury to guarantee up to $5 billion of debt issued following an earthquake by state earthquake insurance programs.

The legislation was never passed out of committee.

According to a CEA memo, the staff will begin working on the bonds and will present a plan for issuance that will see the securities hit the market in the fall.

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