Losses likely for World Bank’s coronavirus-linked bonds – updated

The bonds’ performance is linked to the number of confirmed cases and deaths from the coronavirus outbreak.

The chances of losses for investors who lent millions of dollars via the World Bank’s pandemic catastrophe bonds have soared as the covid-19 outbreak has spread to more than 100 countries so far.

Back in 2017, the World Bank issued its first pandemic catastrophe bond, or cat bond. Cat bonds are insurance-linked securities whose value is tied to non-financial risks, such as the probability of natural disasters.

Pension funds, dedicated cat bond investors and endowments from the US, Bermuda, Japan and Europe invested in the securities.

The World Bank’s cat bonds were structured into two tranches. A total of $225 million was raised via the class A notes, which cover coronavirus and flu. Another $95 million was raised via the class B notes, which cover coronavirus and four other perils related to infectious diseases, according to the bank’s statement on 28 June 2017. An additional $105 million was deployed in the derivatives market, including swap contacts.

Swiss Reinsurance’s Swiss Re Capital Markets and Munich Re acted as joint structuring agents for the issuance. SRCM was sole bookrunner. AIR Worldwide acted as a risk modeller and calculation agent for the issuance.

The capital was raised to support the bank’s Pandemic Emergency Fund, which aims to fund developing countries facing the risk of a pandemic. The PEF included a trust fund administered by the World Bank’s International Bank for Reconstruction and Development as trustee.

According to World Bank Country and Lending Group data as of June 2019, 117 countries came under the institution’s International Development Association and IBRD coverage. Of these, 17, including the Philippines, Vietnam, Indonesia and India, were classified as lower-middle income economies.

However, the bond investors face higher default risks as pre-agreed trigger events materialised prior to the bond maturity date of 15 July 2020.

A disclosure by the World Bank shows that a group of coordinating entities for the PEF programme should conduct a coverage review no later than six months prior to the maturity date. It is understood that there have been no changes introduced to the current coverage of PEF.

Other interested parties in the PEF programme include the German Federal Ministry for Economic Cooperation and Development, the Ministry of Finance of Japan and Australian Aid – the Australian government’s development unit.

For covid-19, some of the activation criteria such as outbreak size and spread across borders have been met, according to a source from the World Bank. Before the bonds pay out, two additional criteria need to be met: A 12-week period from the start of a non-flu outbreak. For the current coronavirus outbreak, the WHO start date was 31 December 2019. The 84-day period means that date is 23 March 2020. A positive growth rate in the IDA/IBRD countries (IDA or IBRD covered countries). This will be assessed by an independent calculating agent upon completion of the 12-week period, the assessment can take two weeks or longer.

It is understood that once the criteria are met countries are getting payouts and investors are getting reductions of principal under a Pandemic Bond before the maturity date.

According to the PEF Operational Manual released by the World Bank on 15 October 2018, the maximum payout per event was capped at $195.83 million for the coronavirus. The entire payment is made when pre-agreed activation criteria thresholds are reached, although this varies per tranche and is based on the number of confirmed deaths and geographic spread.

As of the morning of 9 March 2020, there were as many as 101,000 confirmed cases worldwide of the coronavirus and 3,809 deaths from it, data compiled by the World Health Organization showed. China was the country most severely affected, with 80,904 reported cases and 3,123 deaths.

A spokesman for Munich Re told PDI: “Generally speaking, the potential economic consequences of severe global pandemics – which is even beyond the scale of the current covid-19 outbreak – are of a magnitude which cannot be borne by individual companies.”

“In regard to specific pandemic risk transactions, you will see two effects: the current event illustrates the risk to investors and potential indirect impacts on other asset classes, while simultaneously the demand for new and further solutions may increase.”

Swiss Re and AIR Worldwide declined to comment.

The story has been updated per additional comments provided by a World Bank source on 11 and 12 March.