New York's Metropolitan Transportation Authority (MTA), thebiggest transportation network in North America, is selling a $125million “catastrophe” bond designed to cover the costs of damagefrom a future storm or hurricane, investors said on Monday.

The MTA, which suffered a $5 billion hit from Hurricane Sandy inOctober 2012, will be able to offload the risk of incurring similarstorm-related losses to investors, who will receive a yield inreturn for agreeing to pick up future repair bills.

New York is preparing for an increase in severe weather afterSandy caused more than $30 billion of damage in the state. The cityhas just announced a $20 billion infrastructure plan to boost itsstorm defences, and the state now includes a warning about severeweather threats in its bond prospectuses.

The MTA bond will be issued by First Mutual TransportationAssurance Co, a so-called captive insurer, or insurance companythat the MTA set up to sell similar financial instruments tospecialist investors.

The MTA, which operates New York City's subway and bus system,area bridges and tunnels and commuter railroads, was notimmediately available to provide details.

First Mutual will sell the cat bond through a Bermuda-basedvehicle called MetroCat Re Ltd, which transfers all potentiallosses to capital market investors. Investors receive a high rateof interest but risk losing all or part of their money if acatastrophe occurs.

Standard & Poor's assigned a BB- rating to the notes to beissued by MetroCat Re 2013 Ltd, the credit rating agency said in areport issued on Friday.

A 2010 examination of First Mutual conducted by New Yorkregulators indicated that it had about $1 billion inreinsurance lined up for property claims. But once that moneyruns out, someone else has to step in.

After Hurricane Sandy, the MTA took on short term debt andsqueezed its already tight budget to pay for nearly $4.8 billion ofrepairs to its infrastructure. It also posted $268 million inoperating losses.

Cat bond sales are expected to hit record levels by the end of2013 – at least matching the market record of $7 billion, accordingto brokers and reinsurers.

The sector has seen an estimated $4.36 billion of issuance sofar in 2013, according to the Willis Capital Markets and Advisory,the capital markets arm of reinsurance broker Willis Re.