Best Rates Shackleton Re Debt Issues

A.M. Best Co. has assigned debt ratings to two debt issues from Shackleton Re Limited, a newly created Cayman Islands exempted company licensed as a restricted Class B insurer. Both issues are designed to act as back-up security for Bermuda’s Endurance Specialty Insurance Ltd.

Best rated a $110 million Senior Secured Credit Facility due August 7, 2008, which consists of two tranches: a $60 million Tranche B Term Loan, which is assigned a debt rating of “bb”, and a $50 million Tranche C Term Loan, which is assigned a debt rating of “bb+”. The outlook for both ratings is stable.

Best has also assigned a debt rating of “b+” to the $125 million Principal-at-Risk Variable Rate Notes due February 7, 2008, issued by Shackleton Re, also with a stable outlook.

Concerning both notes, Best explained: “The primary business purpose for the creation of the issuer is for the issuance of various types of debt and servicing and performance of various agreements entered into, including the reinsurance agreement, trust agreement and other related covenants.

“Proceeds from the issuance of the loans will be deposited into a collateral trust account and will be available to pay amounts owed by the issuer. This includes amounts owed to the swap counterparty; loss payments required to be made by the issuer under a multi-year reinsurance agreement entered into between the issuer and Endurance Specialty Insurance Ltd., providing coverage for certain earthquakes within the specific covered area.

The Senior Secured Credit Facility covers “payments in respect of such loans under a credit agreement among the issuer, various lenders and Goldman Sachs Credit Partners L.P. (the credit agreement). The proceeds will be deposited into an eligible bank institution that has a long-term deposit rating that meets or exceeds the minimum pre-established rating threshold.

The Principal-at-Risk Variable Rate Notes payments are covered under an indenture between the issuer and JPMorgan Chase Bank, N.A. “The proceeds will be deposited into an eligible bank institution that has a long-term deposit rating that meets or exceeds the minimum pre-established rating threshold,” said Best.

Both the notes and the loans “have limited recourse to certain assets of the issuer and are without recourse to the ceding insurer, Endurance,” Best explained. “These loans further strengthen Endurance’s solid reinsurance program, although there is basis risk associated with the transaction. The ratings of the ceding insurer remain unchanged.”

Concerning the notes, Best said “the assigned debt ratings represent an opinion as to the issuer’s ability to meet its financial obligations to security holders when due. The ratings consider the probability of loss payments made when an earthquake occurs within the applicable risk period and has caused insured personal and commercial property losses in the covered territories exceeding a stated threshold amount. The annualized attachment probability of Tranche B Term Loan of 1.49 percent and Tranche C Term Loan of 0.96 percent was calculated using RMS’s Interim Catastrophe Model, which is based upon Risk Link(R) (RL) 5.0 with adjustments to approximate the results of the recently released RL 6.0 model version.”

The loans’ rating also “represents an opinion as to the issuer’s ability to meet its financial obligations to security holders when due.” It takes in to account “the probability of loss payments made when an earthquake occurs within the applicable risk period and has caused insured personal and commercial property losses in the covered territories exceeding a stated threshold amount. The annualized attachment probability of 2.07 percent was calculated using RMS’s Interim Catastrophe Model, which is based upon Risk Link(R) (RL) 5.0 with adjustments to approximate the results of the recently released RL 6.0 model version.”

In both cases the “rating takes into consideration the creditworthiness of Endurance, who under the reinsurance agreement, is responsible for making periodic payments (premium and expense reimbursements) to the issuer,” Best concluded.