The Chilean government has reached a $630m catastrophe bond and swap deal with World Bank unit International Bank for Reconstruction and Development (IBRD) as protection against the disruptive economic effects of earthquakes and ensuing tsunamis.
This includes $350m in catastrophe bonds and $280m in catastrophe swaps.
The arrangement covers Chile for three years, with pre-defined parametric criteria for an earthquake’s severity and location to trigger payouts.
This marks World Bank’s largest single country catastrophe bond and swap transaction and its second for Chile.
It is also the first catastrophe bond listed on the Hong Kong Exchange (HKEX).
The move is aimed at safeguarding the South American nation’s fiscal budget, cutting down the need for debt issuance, and making funds available in the event of disasters.
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Located in the Pacific Ring of Fire, Chile experiences frequent earthquakes. In 1960, the country saw an earthquake of 9.5 magnitude, the largest ever recorded worldwide.
World Bank vice president for Latin America and the Caribbean Carlos Felipe Jaramillo said: “Chile is one of the most seismically active countries in the world, experiencing some of the largest earthquakes ever recorded.
“Through the intermediation of the World Bank, this CAT bond allows Chile to transfer major earthquake risks to the capital markets while enabling the authorities to respond quickly to the needs of citizens when calamities strike.”
AIR Worldwide offered risk modeling and analysis for the deal, while Mercer Investments (HK) served as the joint manager.
Aon Securities, GC Securities, and Swiss Re Capital Markets acted as joint structuring agent, joint manager and joint bookrunner for the deal.