Pandemic Bonds Get Stay of Execution but Prospect of Wipeout Looms

By Tasos Vossos | April 16, 2020

A ruling last week not to wipe out holders of a World Bank financial instrument providing emergency funds to poor countries in a pandemic, was just a stay of execution if bond markets are to be believed.

The riskier $95 million portion of two tranches of these so-called catastrophe bonds is quoted slightly above 10% of face value, according to investors who hold the securities. Even the safer $225 million part is down about 15%, the investors said, asking not to be named discussing information that isn’t public.

That’s almost unchanged from levels before a report into the coronavirus outbreak by AIR Worldwide Corp., a Boston-based company appointed by the World Bank to decide whether a pandemic is serious enough to trigger the instruments.

Officials at AIR and the World Bank didn’t immediately respond to messages seeking comment on the bond prices.

AIR determined last week that the current outbreak hadn’t met the “exponential growth rate” of cases in eligible countries needed to activate the securities. It reports again on Friday and the market pricing suggests investors don’t think their luck will hold much longer.

“It is still possible that the pandemic bonds will be triggered before their maturity” Marcos Alvarez, head of insurance at DBRS Morningstar wrote in a note on Monday, arguing the growth rate in cases “could turn positive in late May.”

The World Bank sold the bonds to investors in 2017 in the wake of an Ebola outbreak in Africa. Asset managers bought the notes, which mature in July, and receive regular interest in exchange for the risk of losing the money if an outbreak is severe enough to hit all of the bond’s triggers.

A writedown last week would have wiped out the risky tranche and slashed the safer note’s face value by 16.67%, transferring $132.5 million to the World Bank’s Pandemic Emergency Financing Facility.

Photograph: Health workers prepare themselves before entering the Hospital Del Mar temporary field hospital set up to receive Covid-19 patients in Barcelona on April 10. Photo credit: Angel Garcia/Bloomberg.

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