Hedge Fund Fermat Invests in First-of-a-Kind Catastrophe Bonds

Fermat Capital Management has invested in the Asian Development Bank’s first-ever catastrophe bonds, designed to shield Kyrgyzstan and Tajikistan against specific types of natural disasters.

The two sovereign bonds — each $80 million in size and with a three-year tenor — will pay out to impacted communities if predefined levels of precipitation are breached, or if earthquakes reach particular magnitudes, regardless of actual losses.

“Fermat is generally called upon to be the lead investor in first-of-its-kind deals such as this one,” a spokesperson for the Connecticut-based firm said in an emailed response to questions, confirming it had participated in the ADB bond sale.

The hedge fund manager, which has been investing in cat bonds for more than 20 years, said the ADB’s governance mechanism allows “for the transparent, accountable disbursement of bond proceeds in the rare event that a payout is triggered,” the spokesperson said. Fermat declined to specify the size of its investment.

Catastrophe bonds have risen in prominence in recent years, in large part as climate change contributes to more frequent extreme weather events. The Swiss Re total return index tracking cat bonds is up more than 60% over the past five years, which has helped underpin demand for the securities. Investors receive both coupon payments and the principal at maturity if a predefined disaster doesn’t occur.

Central Asia is one of the most earthquake-prone regions in the world, and countries such as Tajikistan and Kyrgyzstan are also vulnerable to floods from glacial melt. “ADB plans to explore future issuances supporting other countries who are vulnerable to severe disasters,” Anthony Ruschpler, the bank’s principal treasury specialist, said in an email.

The precipitation trigger used in the newly issued bonds is based on an index that combines accumulated rainfall over a defined period with adjustments for snowfall conditions, terrain slope and population exposure to reflect the likelihood of flooding, Ruschpler said. This will be a “world-first catastrophe bond covering extreme precipitation risks,” he said.

Of the $80 million of bonds issued for each of the countries covered, $70 million will provide protection against earthquake risk and $10 million against extreme precipitation.