Thursday, 18 October 2007

Not MBS? Wave it in...

From the FT:
Investors scrambled to buy a multimillion-dollar catastrophe bond on Wednesday as the market for natural disaster debt continued to boom.

“Investors like these bonds because of the high premiums and the fact there are very few pay-outs. It is also a great diversification play. These investments are not linked in any way to subprime. That also explains why the market has continued to boom despite the credit problems over the summer.”
This is a BB+ cat bond paying Libor plus 275, and people are waving it in because it is not a credit instrument and specifically because it is not a mortgage backed security. Gosh, that let's avoid the place the lightening struck last week and go and stand under a different tall tree during a storm strategy always works, doesn't it? The bond may or may not be a good deal but it has to be a cause for concern if it is being bought by people who are more interested in what it isn't than in what it is.

The illustration shows some underwriters' desks at Lloyds of London. Perhaps they have left the building thanks to the willingness of the capital markets to take their risk?

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