Philippines Eyes Catastrophe Bonds to Cut Post-Typhoon Rebuilding Costs

By and Siegfrid Alegado | April 17, 2015

The Philippines suffered $13 billion of damage when Super Typhoon Haiyan tore through the country in 2013, a year after another storm killed 1,067. Now, the nation is looking at defraying the costs of future calamities with catastrophe bonds.

The government is in talks with the World Bank on a possible foreign-currency offer of the notes, National Treasurer Roberto Tan said in a mobile-phone text message on Monday, an idea floated by Finance Secretary Cesar Purisima in 2013. Issuers of the debt, usually sold by insurers, pay higher yields but in the event of a major natural disaster interest payments are foregone or the principal is reduced.

“Among the greatest threats to the Philippine growth story is our heightened exposure to disaster risk,” Tan said in a March 14 interview near Cebu City. The World Bank might issue the notes on the country’s behalf, he said this week.

A catastrophe bond sale would help meet rebuilding costs after major calamities like Haiyan, which killed more than 6,000 people and washed away parts of the city of Tacloban in November 2013. As well as being lashed by frequent typhoons, the country’s location on the Pacific Ring of Fire means it’s prone to earthquakes and volcanic eruptions.

The Philippines suffered losses of $24.5 billion, or 3.8 percent of gross domestic product, due to weather-related events in 2013, according to Germanwatch. The environmental group says the country was the seventh-most affected by natural disasters between 1993 and 2012, according to its Global Climate Risk Index 2014.

Mexican Sale

Typhoon Bopha did more than $800 million of damage in December 2012 and last year Typhoon Rammasun cost the country $871 million. In the most recent major quake, in 2013, about $50 million of damage was done on Cebu and Bohol islands.

There are $22.8 billion of catastrophe bonds outstanding worldwide, according to Bloomberg-compiled data. Mexico obtained $315 million of natural-disaster protection via the debt in October 2012.

The three-year securities were oversubscribed by 200 percent to 450 percent depending on the peril insured and class of notes issued, according to a statement by the World Bank, which arranged the sale. Mexico was able to achieve terms that were highly competitive with more traditional reinsurance, the multilateral lender said in the statement.

Fast Growth

The complexity of pricing and modeling disaster risk has delayed the Philippine offer, Treasurer Tan said. The nation wants a structure where proceeds are generated and the servicing can be offset in the event of a calamity, he said.

Under the stewardship of President Benigno Aquino, the Philippines has become Southeast Asia’s fastest-growing economy. Gross domestic product rose 6.1 percent last year, following increases of 7.2 percent in 2013 and 6.8 percent in 2012.

There would probably be strong demand for a catastrophe bond offer from the Philippines, said Jonathan Ravelas, chief market strategist at Manila-based BDO Unibank Inc., a buyer of the country’s dollar debt.

“People will take it, especially after the Philippines’ upgrade to an investment rating,” he said in an interview in Manila on Thursday. “The market is hungry for yield.”

The nation, which Moody’s Investors Service rates two levels above junk, has a five-year credit-default swap rate of 88.5 basis points. That compares with Thailand and Malaysia, where the similar costs to insure debt against non-payment are 103 and 123 points, respectively.

‘Several Structures’

The Philippines last sold dollar bonds in January, issuing $2 billion of 25-year notes at a record low yield of 3.95 percent in an offer that was seven times oversubscribed. The securities yielded 3.54 percent on Thursday.

Catastrophe bonds are “not an asset class I am very familiar with,” said Benjamin Cryer, a Singapore-based portfolio manager for the Franklin Asia Credit Fund of Franklin Templeton Investments. “I’m sure there will be a buyer there, I’m just not sure we are among them.”

The disaster preparedness of Philippine local governments is more reactive than proactive and 16 major cities aren’t ready for the effects of climate change, according to an April 13 story in the Philippine Daily Inquirer that cited a study by the World Wildlife Fund and the BPI Foundation.

The decision on whether the country goes ahead with the proposed sale will depend on more talks with the World Bank, Treasurer Tan said. The multilateral lender issued catastrophe bond linked to earthquake and tropical cyclone risk in 16 Caribbean countries in June 2014, it said in a statement.

“Investors are familiar with the World Bank because they’ve been issuing cat bonds on behalf of other countries,” Tan said. “We’re discussing several structures with them but there’s nothing firm.”

–With assistance from Christopher Langner in Singapore and Clarissa Batino in Manila.

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