The collapse of Lehman Brothers sent waves of many different kinds through the capital markets. One of the less obvious was in the market for natural catastrophe bonds, or cat bonds, where it alerted investors to a need for more secure collateral. In structuring a new issue for reinsurer Hannover Re - using special purpose vehicle (SPV) Eurus II - the BNP Paribas cat bond team has come up with an inventive repo-based solution.
With outstanding issues worth some $11bn - down from its 2007 peak of $15bn - the cat bond market isn't exactly huge but it is of growing interest to investors in search of alternative returns. It began to evolve in the 1990s as a source of additional capacity in the reinsurance market.
