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Pylon : the securitization of weather risk on electricity distribution lines

Pylon : the securitization of weather risk on electricity distribution lines. WRMA, 04-November-2004, London. Agenda. Transaction Summary Learnings for the Weather Derivatives Market. Motivations for the transaction. Lothar & Martin = high cost for EDF (600 to 800 MEUR)

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Pylon : the securitization of weather risk on electricity distribution lines

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  1. Pylon : the securitization of weather risk on electricity distribution lines WRMA, 04-November-2004, London

  2. Agenda • Transaction Summary • Learnings for the Weather Derivatives Market

  3. Motivations for the transaction • Lothar & Martin = high cost for EDF (600 to 800 MEUR) • Main risk = windstorm on distribution lines • Lack of capacity on the traditional markets • Research of a multi–year solution • Research of a solution with a high credit profile • Research of a transparent solution

  4. Issuance structure EDF Financial Contract Premium CDC ICM Counterparty Contract Premium Up to Original Principal Amount at Redemption EURIBOR - []% Pylon Ltd. Class A&B Notes EURIBOR + []% CDC ICM Collateral Account Investment Income Original Principal Amount

  5. Transaction terms

  6. Summary of the Notes Class B Notes Class A Notes

  7. Definition of the index Windstorm Index Value = • The Maximum Calculated Peak-Gust Windspeed : computed through an interpolation process based on measurements from up to approximately 150 WMO (World Meteorological Organization) meteorological recording stations across the Covered Area.

  8. Geographical distribution of weights 0 . 0 - 0 . 1 0 . 1 - 0 . 5 0 . 5 - 1 . 0 1 . 0 - 2 . 0 2 . 0 - 4 . 5 Weight [%]

  9. Trigger mechanism After a First Event Before Any Trigger Event Class Bnotes EUR 120million Class Anotes EUR 70million Overall Annualized Attachment Probability 1.23% Class Bnotes Outstanding Principal Amount in Class B Notes Annualized LossProbability =2.51%

  10. Trigger mechanism Scenario 1 : Only 1 euro of the Class B notes is used by a First Event, the ITL drops down 2.51% Class B 3706 8200 Initial situation Class A 10820 0.48% 1.26% 5508 Class B 2.51% 10002 0.17% Class A 3706 6326 Scenario 2 : The Class B notes are completely redeemed following a First Event 0.87%

  11. Trigger mechanism Scenario 3 : EUR 60 million of the Class B notes are redeemed following a First Event 2.51% Class B 3706 5953 Initial situation Class A 8573 1.26% 5508 Class B 10002 0.17%

  12. A reduction of the tick • Mitigation of the risk by EDF  Need for a variation of the tick. • Example, the calculation of the Class B Principal Reduction Amount : • where BIC refers to the Class B notes Index Capacity (4494) After a First Event, ITL drops down Each anniversary year, the “rate of payment” (~the tick) is reduced

  13. Historical events 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 Pre-Drop-down B Notes Exhaustion (for year 1): 10002 1999 Dec 27 Martin A Notes Exhaustion (for year 1) if B Notes are exhausted : 6326 6489 Index 1st Event Attachment: 5508 1999 Dec 26 Lothar 4945 1987 Oct 15 87J 2nd Event Attachment (Drop-down): 3706 3851 1990 Jan 25 Daria (90A) 1982 Nov 6 1976 Nov 30 3251 3220 3460 1967 March 12 1990 Feb 3 Herta 1947 1990 Feb 26 Vivian 1965 Nov 25 1970 Feb 10 1943 569 1003 790 Year of Windstorm Occurrence

  14. Agenda • Transaction Summary • Learnings for the Weather Derivatives Market

  15. Learnings from the client standpoint • A corporate approach (basis risk, innovative approach, need for a highly structured solution) • A non-USD solution • Necessary validation by legal & tax counsels, auditors, etc.. (need for a counsel). • Efficient communication (vs. derivatives)

  16. Learnings from the investors standpoint • Investors basis = almost without (re)insurance companies • Increasing number of hedge funds, specialized funds, etc.. • Interest from non-specialist investors (demand for « attractive underlyings ») • Convergence between weather derivatives / cat bonds • Specialized weather investors are advantaged • Recently, « frequent storms » are traded • Need for more out-of-the-money temperatures deals (e.g., frost deal) to attract non-specialist investors to the weather market

  17. Alternative Risk Structuring Tanguy Claquin e-mail : tclaquin@ixis-cib.com tel : +33 (0)1 58 55 10 44 Nicolas Mérigot e-mail : nmerigot@ixis-cib.com tel : +33 (0)1 58 55 10 37 Michel Quéruel e-mail : mqueruel@ixis-cib.com tel : +33 (0)1 58 55 10 41

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