South Ferry Subway Station, New York City, After Superstorm Sandy
Debris litters the entrance Wednesday inside the South Ferry subway station in Lower Manhattan, New York City, after it was flooded by seawater from Superstorm Sandy. Reuters

New York City’s Metropolitan Transportation Authority, or MTA, is preparing to issue a bond linked only to damages from storm surges similar to those that caused nearly $5 billion in damage to the city’s transportation infrastructure after Hurricane Sandy slammed the city on Oct. 29, 2012.

The bonds are specialized investments known as catastrophe bonds, or "cat bonds." Cat bonds are high-yield debt most often linked to insurance. They're used to raise money in case of a catastrophe such as a hurricane or earthquake. The terms of the bonds generally state that if the issuer suffers a loss from a pre-defined catastrophe, then the issuer's obligation to pay interest and/or repay the principal is either deferred or forgiven.

Bond buyers would lose money when surges from future storms reach certain thresholds. According to SourceMedia, this has occurred twice since 1900: during Sandy and during Hurricane Donna in 1960, a hurricane so strong it was immortalized in American author John Steinbeck’s memoir, “Travels With Charley.”

The damages to the city’s transportation infrastructure from Sandy represented roughly 20 percent of the $22 billion in the city's total damages from the storm, which inundated subway tunnels and rail stations, causing significant surge-related saltwater damage to electrical components.

The country’s largest municipal transit agency will buy coverage from Bermuda's specialty insurer MetroCat Re Ltd., which will issue three-year securities, according to a report last week from Standard & Poor’s. If the MTA is again hit with a Sandy-like surge, it will trigger payments to its First Mutual Transportation Assurance Co. at the cost to investors.