Bonds

Florida heads to market with $1.5B taxable CAT bond sale

Florida is coming to market early this week with a $1.5 billion taxable bond sale to bulk up the state’s Hurricane Catastrophe Fund.

The State Board of Administration Finance Corp. is planning to issue $1.5 billion of taxable revenue bonds in two maturities.

“We convened with the underwriting group today and signed off on what we are going to be offering,” Ben Watkins, director of the state’s Bond Division, told The Bond Buyer on Friday.

“We convened with the underwriting group today and signed off on what we are going to be offering,” Ben Watkins, director of the State of Florida’s Bond Division, said Friday.

Donna Alberico

“We were originally thinking that we would offer five-, seven- and 10-year maturities, with $500 million in each tranche,” he said. “But we decided today to just offer 5s and 10s — $500 million of five-year bonds and $1 billion of 10-year year bonds.”

The reason for the change, he said, was “we’re really looking for longer-dated bonds with more permanence — having that layer of liquidity available to us — so that longer-dated works better for us.”

The proceeds would replace some of the $1.25 billion of bonds rolling off from the $3.5 billion 2020 CAT bond sale, he said.

The current interest-rate environment, he noted, is about 300 basis points higher than when the state sold CAT bonds four years ago.

Taxable deals are priced with the spread to Treasuries in mind.

Price talk on the deal has been at about 100 basis points over the comparable 10-year Treasury security and somewhat lower for the five-years.

Morgan Stanley as senior bookrunning manager is set to price the taxable Series 2024A revenue bonds as early as Monday with BofA Securities, J.P. Morgan and Wells Fargo serving as co-senior managers.

Raymond James is the financial advisor; Nabors, Giblin & Nickerson is the bond counsel.

The deal is rated Aa3 by Moody’s Ratings and AA by S&P Global Ratings, Fitch Ratings and Kroll Bond Rating Agency.

All four rating agencies have a stable outlook on the credit.

Proceeds will go to the CAT fund to make reimbursement payments to insurers for reimbursable losses caused by any future covered events.

“The bonds are secured primarily by reimbursement premiums collected from virtually all residential property insurers in the state of Florida,” Pat Luby, head of municipal strategy at CreditSights, said in a Friday report. “Neither the credit, revenues or the taxing power of the state are pledged to the bonds.”

He added, the CAT fund is one component of the state’s efforts to promote long-term stability in Florida’s residential property insurance marketplace.

The CAT fund provides a stable and ongoing source of loss reimbursement for residential property insurers and functions like a private reinsurer by collecting premiums from residential property insurers and reimbursing them for covered residential losses, according to an investor presentation.

In Florida, participation in the fund is mandatory for almost all residential property insurers; the fund’s liability is statutorily limited.

This was the first time KBRA rated the credit.

KBRA said its AA rating reflected the CAT fund’s “strong debt repayment capabilities, which derive from its ability to levy assessments on almost all property and casualty insurance policies statewide.

“Assessments, if levied, are charged directly to policyholders and, while subject to single-year and annual aggregate limits, can be collected for as long as bonds are outstanding,” KBRA said.

KBRA said consistent growth in fund’s broad assessment base, which in 2022 totaled $72.6 billion, is attributable to growth in the state’s population as well as to rapid increases in insurance premiums in recent years.

“Assessments are levied on over 90% of property and casualty insurance premiums statewide. Auto insurance, homeowner policies and all other lines have comprised, on average, 41%, 20% and 39% of the assessable base, respectively, since 2013.” KBRA said.

The agency noted the fund’s assessment mechanism was successfully tested from fiscal 2007 through fiscal 2015 and is expected to function even while the state is recovering from a catastrophic event.

“Assessments, which are highly enforceable, may be levied without legislative approval for as long as bonds are outstanding, at up to 6% of annual premiums for losses attributable to a single year, subject to a 10% cap for aggregate assessments from storm losses in multiple years,” KBRA said.

“We are really excited about the deal coming to market now,” he said, “We had some volatility in the markets after that hot consumer price index number coming in, but the Treasury market has improved since then and the market seems to be functioning just fine.”

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