S&P Revives Cat Bond Rating Then Promptly Sends it to Default

The $84.5 million series 1 class A-1 notes of Cayman-domiciled Carillon Ltd. entered into default after being withdrawn and then reinstated, according to a statement from Standard & Poor’s.

The catastrophe bond — which was issued by Munich Re in 2006 to protect it from hurricane losses in the U.S. Gulf Coast and Northeast — was lowered to “D” after making all quarterly interest payments but missing its final principal payment at maturity on January 8.

The bond’s rating was at first withdrawn rather than downgraded because of “administrative error,” says Dennis Sugrue, an analyst with S&P in London.

Surgure explained that ratings are usually withdrawn on bonds at their legal final maturity date. However, since Carillon had been downgraded and then missed it’s final principal payment the structure should have entered a three month extension period to reflect its default.

“It should have gone to default on January 8th,” Sugrue says.

Carillon is one of four catastrophe bonds that were downgraded by S&P following the collapse of Lehman Brothers in September of 2008.

Like the other structures backed by Lehman collateral, losses on the bond’s total return swap has resulted in investment losses making it impossible for the bonds to pay principal.

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