Asia Times: Tokyo Disneyland operator to sell $200m in earthquack bonds



	April 27, 1999	atimes.com

Japan Economy

Tokyo Disneyland operator to sell $200m in earthquack bonds

NEW YORK - Oriental Land Co., whichoperates Tokyo Disneyland, is planning to sell about $200 millionof bonds to insure against the risk of a Tokyo earthquake, andlet investors bet on the likelihood of a quake.

The sale, if completed, would be the first catastrophe-related bond sale by a company outside the insurance industry, investors and analysts said. Oriental Land, which is based inChiba, Japan, is hoping the protection it buys through thecapital market will be cheaper than traditional insurance.

Investors who buy the securities will reap a hefty yieldpremium over U.S. Treasuries if a quake doesn't occur. If thereis a quake, they may lose their interest or principal, dependingon Oriental's damages.''I think you'll have a pretty good audience,'' said DavidMocklow, a director at Aon Capital Markets, who is consideringbuying part of the issue.

Insurers pioneered the market in catastrophe bonds to helpprotect themselves against the most expensive disasters, such asearthquakes or hurricanes in densely populated areas. They havesold about $4 billion of securities whose performance is linkedto the occurrence of various disasters, including windstorms andhailstorms.

''It isn't much different from taking out a $1,000 deductibleon your auto insurance,'' said Standard & Poor's Corp. analystAlan Levin. The Japanese company would bear any earthquake lossesup to a given level, and then be reimbursed for additionaldamages, he said.

The cost of earthquake insurance rose worldwide after thequakes in Northridge, California and Kobe, Japan in the mid-1990shit some insurers with larger-than-expected losses. Premiums havesince declined, though insurers are turning more often to thecapital markets as a place to lay off some of their risk,supplementing policies they buy from reinsurance companies.

British Petroleum Co. explored a similar type of issue twoyears ago to insure against oil-spill accidents, though thecompany wound up buying a traditional insurance policy instead.

The Oriental Land sale will be split into two classes, eachabout $100 million. Investor in the first class, a five-yearissue, would risk losing principal and interest if Disney's parkis rattled by a quake. Oriental Land company could use the $100million to cover damages to the park.

The second class will repay investors their principal,regardless of whether there is an earthquake, though a quakewould cause their maturity to increase to eight and one-halfyears from five. Oriental Land would use the proceeds from thissecond class of derivatives as emergency financing if its ownability to borrow is impaired, either because of a reduced creditrating or damage to Tokyo Disneyland.

Metropolitan Tokyo sits atop one of the most geologicallycomplex fault lines in the world. Three tectonic plates, orpieces of the earth's crust, converge beneath the Japanese capital.

The city was virtually destroyed by a massive earthquake andsubsequent fire on Sept. 1, 1923, which killed more than 100,000people. A study of the history of earthquakes to have hit thearea led seismologist Kawasumi Hiroshi to estimate the occurranceof great earthquakes in Tokyo at 69 years.

John DeCaro, who trades catastrophe notes at Aon, said heexpects the first class could sell in the mid-350 basis pointrange over five-year Treasuries, and the second could sell at aspread of between 75 and 95 basis points, though the structuresare still subject to change.

Both classes are expected to receive ''BB+'' ratings, or theequivalent, from Moody's Investors Service Inc. and S&P.

The securities are unique in that they combine earthquakerisk and emergency financing risk, Mocklow said. Previous salesinvolved just one risk or the other.''In Japan, the reason why they're doing it is it's muchmore difficult to get reinsurance in the traditional market andalso much more expensive,'' said Lawrence Kwoh, who is rating theissue for Moody's.

Immediately after the sale, the proceeds would be depositedin a Cayman Islands-based trust, probably to be invested in U.S.Treasuries or other safe government issues.

The interest from the trust will cover payments due toinvestors until there is a large earthquake. In the event of aquake, the securities from the trust could be sold to raise cashto cover the Japanese company's damages. The magnitude of earthquake and losses at Tokyo Disneylandthat would trigger such a pay out hasn't yet been determined.Goldman, Sachs & Co., which is managing the sale, declined tocomment.

In March, Aon Capital Markets arranged a $100 million saleof derivatives linked to earthquakes along the New Madrid faultline, named for a Missouri town where three quakes struck in 1811and 1812 and changed the course of the Mississippi river.

The sale allowed the Kemper Insurance Cos. to shed its riskon policies in seven states along the fault line. A similar quaketoday could be one of the most expensive disasters insurers canimagine.

Aon sold its securities through a Delaware corporationDomestic Inc., so named because it was the first catastrophederivative not sold through an offshore trust. It was also thefirst issue linked exclusively to the risk of New Madrid faultline quakes, DeCaro said.

(Bloomberg)

back to the top

©1999 Asia Times Online Co., Ltd.