Coronavirus Likely to Trigger Pandemic Bond Payouts to Poor Countries

By Tasos Vossos | March 11, 2020

The severity of the global coronavirus epidemic has reached levels almost certain to trigger a financial instrument sold by the World Bank to raise money for developing countries in a pandemic.

The bonds, which were sold in 2017, are quoted at less than 10% of face value by some brokers on the riskier of two tranches, according to investors who own the securities. Two weeks ago they were at 60%.

The securities are structured so that they are written down following outbreaks of certain diseases named as covered perils. The quoted price of the $95 million risky “Class B” portion of the debt means investors think a wipeout is all but inevitable when a mandatory period since the start of the outbreak expires on March 23.

The safer Class A tranche is quoted at around 85 cents, said the investors, who asked not to be named because the information is private. Holders of this $225 million tranche face losses of 16.67%.

The bonds were issued to raise money to help poorer countries respond to a pandemic. Boston-based private company AIR Worldwide Corporation determines whether a trigger event has occurred, based on an outbreak meeting a list of criteria in areas such as geographic spread, rate of growth and number of deaths.

Officials at AIR and the World Bank did not immediately respond to requests for comment on Wednesday.

Triggered Soon

Previous incidents, such as an Ebola outbreak in the Democratic Republic of Congo last year, were not deemed serious enough to trigger the bonds.

“Despite a number of complaints in the early stages of the current coronavirus outbreak which highlighted that pandemic bonds would not likely pay out, we believe that they will actually be triggered soon,” Marcos Alvarez, head of insurance at DBRS Morningstar, wrote in a note last week.

Deaths from the coronavirus, known as Covid-19, have surpassed 4,000 worldwide and the number of infections is approaching 120,000, according to data compiled by Bloomberg.

The bonds are due to mature in July. In the meantime, the World Bank is already working on the second iteration of the emergency fund, called PEF 2.0, and plans to start marketing its risk-transfer mechanism around May.

Potential losses for bondholders in coming weeks may not dent demand for the next series of pandemic bonds, however.

“Investors in this market expect that certain bonds take losses at times,” said Craig Bonder, head of insurance-linked securities trading at Beech Hill Securities. “It’s a robust market that can withstand these kind of losses and continue to grow.”

Investors greeted the existing bonds enthusiastically when they were first sold three years ago, ordering two times the amount being offered. Proceeds from the sale funded the World Bank’s Pandemic Emergency Financing Facility, or PEF.

At the time, the World Bank said the transaction “enables PEF to potentially save millions of lives.” The facility was a response to the West Africa Ebola outbreak in 2014 that killed more than 11,000 people.

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