Moody’s downgrades Muteki bond following Japan quake

Investors in Munich Re’s Muteki catastrophe bond could face a complete loss of their investment as a result of the March 11 Japan earthquake, according to rating agency Moody’s.

Moody’s has downgraded the class A notes, originally issued on 14 May 2008, to C(sf) from Ba2(sf).

The bond programme protects Munich Re against exposures it has assumed by providing earthquake reinsurance to Japanese agricultural mutual insurer Zenkyoren.

Based on calculations it has performed on seismic data obtained from earthquake data provider K-Net, Moody’s expects the losses from the 11 March earthquake will breach the bonds’ trigger point and reach the exhaustion level, which will likely result in “complete loss of principal to class A noteholders”.

Muteki is a single-peril cat bond that uses a parametric index to determine the occurrence and severity of Japanese earthquakes. The index value is based on data published by K-Net.

“Moody's will continue to assess the full impact of the Japan earthquake on the rating of the class A notes following release of the complete data from K-Net to the public, the receipt of an event notice from the counterparty [Munich Re], and the receipt of an event report from AIR Worldwide Corporation, the event calculation agent,” Moody’s said in a statement.