{"id":89944,"date":"2020-03-10T02:30:39","date_gmt":"2020-03-10T01:30:39","guid":{"rendered":"http:\/\/beta.next-finance.net\/produit\/coronavirus-disease-covid-19-to-trigger-pandemic-bonds\/"},"modified":"2020-04-30T20:15:21","modified_gmt":"2020-04-30T18:15:21","slug":"coronavirus-disease-covid-19-to-trigger-pandemic-bonds","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/produit\/coronavirus-disease-covid-19-to-trigger-pandemic-bonds\/","title":{"rendered":"Coronavirus Disease (COVID-19) to Trigger Pandemic Bonds"},"content":{"rendered":"

The Pandemic Emergency Financing Facility<\/strong><\/p>\n

In 2017, the International Bank for International Reconstruction and Development (IBRD; part of the
\nWBG) established the PEF following the cross-border 2014\u201315 West African Ebola virus outbreak, which
\ncaused more than 11,000 deaths. This outbreak proved the need for an established funding mechanism
\nto mitigate pandemics in developing countries.<\/p>\n

The IBRD and the International Development Association (IDA; part of the WBG), in collaboration with
\nthe World Health Organization (WHO) and other public- and private-sector partners, designed the PEF to
\nprovide surge funding for response efforts in eligible countries to help prevent rare, high-severity disease
\noutbreaks from becoming pandemics. In general, countries with access to the PEF are those eligible to
\nreceive resources from IDA.[[See http:\/\/ida.worldbank.org\/about\/borrowing-countries for a list of PEF-eligible countries.]]\n

This funding mechanism aims to provide additional financing to help the
\nworld\u2019s poorest countries respond to cross-border, larger-scale outbreaks by complementing, rather than
\nreplacing, the much wider role that IDA as well as other international organizations and donors play in
\nsupporting pandemic responses.
\nPEF funds can be used to finance the cost of response efforts during an outbreak. This includes, but is
\nnot limited to, the deployment of human resources, drugs and medicines, essential and critical lifesaving
\nmedical equipment and personal protective equipment, logistics and supply chain of critical supplies,
\nnonmedical equipment, minor civil works (e.g., setting up temporary attention centres), services,
\ntransportation, hazard payments, and communication and coordination.<\/p>\n

The Insurance Window and Pandemic Bonds<\/strong><\/p>\n

The PEF provides funding to eligible countries through (1) a cash window and (2) an insurance window.
\nThese windows are triggered in different ways and are specifically designed to complement each other.
\nTo date, the PEF has paid out $61.4 million from its cash windows to fight Ebola in the Democratic
\nRepublic of Congo, including $50 million for the current 10th outbreak. The insurance window provides
\ncoverage of up to $425 million, composed of pandemic-risk-linked swaps[[ Since these are private transactions, no public information is available about their triggers.]] for $105 million and two classes of pandemic bonds for $320 million in floating-rate catastrophe-linked capital at-risk notes issued
\nin June 2017 (see Exhibit 1). Class A of these pandemic bonds totalled $225 million while Class B
\ntotalled $95 million. Similar to other catastrophe-linked bonds in the market, investors could lose their
\nprincipal if a set of parametric triggers, such as outbreak size, growth rate, and spread across borders,
\nare met.
\n\"-696.jpg\"<\/a><\/p>\n

Under the current coronavirus outbreak, investors in both classes of IBRD pandemic bonds can
\npotentially lose all or part of their principal, given the conditions outlined in the prospectus of these
\npandemic bonds and the most recent statistical information provided by the WHO. However, we
\nestimate that Class B investors are more likely to be affected and the proportional loss of their principal
\nwill be higher. For an outbreak to become an eligible event under the terms of the IBRD\u2019s pandemic
\nbonds, it needs to meet a certain level of severity in terms of event duration, number of confirmed
\ndeaths, geographical spread, and growth rate.<\/p>\n

The Class A Notes would require the current coronavirus outbreak to (1) cause more than 2,500 fatalities
\nin countries and territories specified in the prospectus with 250 cases confirmed on rolling basis, (2) last
\nat least 12 weeks, and (3) cause more than 20 fatalities in a second country. If these conditions are met,
\nthe Class A Notes would lose 16.67% of principal or $37.5 million,[[A full payout of the Class A Notes (full loss of principal) would be triggered only by an influenza pandemic.]]\nwhich will be available for the PEF to
\ndistribute among governments of certain countries or specialized international agencies. Based on the
\nmost recent data published by the WHO, COVID-19 essentially meets the conditions to trigger the Class
\nA Notes in terms of the number of fatalities and geographic spreads; however, the WHO dates the start
\nof this outbreak on December 31, 2019, which means that the bonds will pay out on March 24, 2020 (the
\n12-week duration period).<\/p>\n

The Class B Notes require fewer fatalities to be triggered (250) while the rest of the conditions are
\nmaterially similar to those for the Class A Notes. The main difference is that, if all conditions are met,
\nClass B investors would lose all principal ($90 million) on March 24, 2020 (see Exhibit 2). As of the date
\nof this commentary, this would be the case for Class B investors, bringing the total amount available in
\nthe PEF to $132.5 million; however, a larger coupon compensates for this higher risk associated with the
\nClass B Notes.<\/p>\n

\"-697.jpg\"<\/a><\/p>\n

Outlook for the Pandemic Bonds Market<\/strong><\/p>\n

IBRD-issued pandemic bonds amounting to $320 million account for a small fraction of total catastrophe
\nbonds, which are currently sized at approximately $37 billion. Although IBRD pandemic bonds were
\noversubscribed in 2017 at over 200%, there have been no other issuances of pandemic bonds since.
\nSimilar to other catastrophe bonds, defining parametric triggers is not an easy task and IBRD pandemic
\nbonds are no exception with a prospectus of almost 400 pages. Although catastrophe bonds are mostly
\nbought by sophisticated institutional investors (see Exhibit 3), the convoluted definition of trigger events
\nfor the different types of pandemics covered might make pandemics bond valuation extremely difficult.<\/p>\n

\"-698.jpg\"<\/a><\/p>\n

The typical investor in catastrophe bonds is attracted to this asset class because it is generally
\nuncorrelated with the general markets; however, the current coronavirus outbreak is showing that the
\nvaluation of pandemic bonds is highly correlated with the performance of global financial markets when
\nit matters most. Pandemic bonds are designed to cover events whose impact is much more global by
\ndefinition while traditional catastrophe bonds are designed to cover earthquakes or hurricanes, which
\ntend to have a more geographically focalized impact, making them less correlated with the overall global
\nmarket.<\/p>\n

Another objection from public health experts is that pandemic bonds are not designed to help poor
\ncountries prevent an outbreak as funding might be available too late. Public health experts have also
\npointed out that pandemic bonds are quite expensive, given that they have high-interest coupons and
\nthat these resources can be invested in the health sector infrastructure of developing countries;
\nhowever, pandemic bonds were never intended to replace other development aid programs, but rather
\nto introduce market-based funding tools to transfer some risk to the financial markets. Despite a number
\nof complaints in the early stages of the current coronavirus outbreak which highlighted that pandemic
\nbonds would not likely pay out, we believe that they will actually be triggered soon and that resources
\nfrom principal write-offs will be available to help the poorest countries in the world manage this extreme
\nevent. It is still to be seen if investors will remain attracted to pandemic bonds after payouts are
\nactivated, but past experience with catastrophe bonds illustrates that interest remains even after large
\nnatural catastrophes affect this asset class. We believe that a second round of pandemic bonds can
\naddress some existing concerns and remain a viable funding source for low-frequency but high-severity
\npandemics.