Investors holding the World Bank’s Pandemic bonds may be facing losses as the coronavirus outbreak spreads to more countries and the death rate escalates. The World Bank launched the bonds to fund its Pandemic Emergency Financing Facility (PEF), worth about $500 million, floated to help developing countries fight any pandemic outbreak. This fund was set up following the Ebola outbreak in Africa.
The PEF is a combination of bonds and derivatives, a cash window, and future commitments from donor countries (Germany and Japan) for additional coverage. The total debts and bonds issued in 2017, were worth $320 million. The PEF covers six viruses that are most likely to cause a pandemic. These include new Orthomyxoviruses (new influenza pandemic virus A), Coronaviridae (SARS, MERS), Filoviridae (Ebola, Marburg) and other zoonotic diseases (Crimean Congo, Rift Valley, Lassa fever). The bonds, in two tranches, offer higher than average returns but the investors stand to lose these returns and the principle if certain criteria are met for a pandemic break, which the coronavirus outbreak is fast approaching.
The first tranche, Debt A, in the form of debt instruments, paid out $225 million at 6.9% annually. But the bonds stand to lose their standing if pandemic deaths in a country reach or go above 2,500, and the virus crosses the international borders and results in more than 20 deaths in other countries.
The other class of bonds have an interest rate of 11.9 percent and reach default when deaths reach 250. The interest rate is higher due to the lower risk bar. The bonds' payout rate rises as more countries report 20 or more confirmed deaths. The World Bank issued $95 million worth of the Class B assets. Those bonds are trading an average of 57 cents on the dollar, according to the Financial Times, and this will likely trigger a payout. This debt class also needs the outbreak to reach 12 weeks since first reports, which will be reached on March 23.
"We are leveraging our capital market expertise, our deep understanding of the health sector, our experience overcoming development challenges, and our strong relationships with donors and the insurance industry to serve the world's poorest people," Jim Yong Kim, World Bank Group's president, said in a 2017 statement, adding that the PEF can "potentially save millions of lives."
In total, more than 60,000 people have been infected, and 1,327 death have been confirmed. So far, there have been 34 deaths outside China, 12 in Iran, eight in South Korea, five in Italy and four in Japan.
“The market believes there is a significant chance the bond will lose a portion of its nominal [value],” said David Strasser, senior portfolio manager at Zurich-based Plenum Investments, which has invested in Tranche A, reports FT.
Many believe that the PEF is a good effort by the World Bank to help developing countries hit by pandemics, but some skeptics fear that it is too little too late. Additionally, there are many hidden caveats in the bonds’ prospectus that needed to be met before the funds can be released. The lock-in period of three months seems to be long for any serious benefits. The time period is enough for the epidemic to spread further.
Also, the PEF payout is a paltry $196 million for the coronavirus, which could be claimed by 76 countries affected by the virus. China has spent around $10 billion on virus control already. The opinion is that the World Bank has enough assets to allocate funds directly rather than through the PEF route.