COVID-19 may trigger the world’s first pandemic bond payout
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If you’ve been reading the corona-crisis financial news closely, you’ll know bonds are making a niche group of experts very worried.
But an even more niche group of experts and investors are eyeing pandemic bonds, which have a payout deadline that is ticking ever closer.
That’s right, in times of rude good health you, if ‘you’ are a pension or super fund or specialise in gambling on disasters, can bet against the possibility of a pandemic.
The World Bank issued $US320m of pandemic bonds in 2017, after seeing how slowly the money was mobilised to sort out the Ebola outbreak in 2014 and how much more money was needed because the crisis was allowed to spiral.
Now those bonds might be about to pay out in just 11 days — to the issuer, not the investors.
Pandemic bonds, like catastrophe bonds where you can bet against, say, a cyclone happening, are disaster insurance on a large scale.
Investors buy a high yield (and therefore very risky) bond from an insurance company. If a specific event occurs, such as a pandemic outbreak, the bond holders lose the principal of the bond which goes to the insurer to defray the costs of the disaster.
The high interest payments compensate investors for the risk, while the insurer knows that if a catastrophe happens during the lifetime of the bond, it’ll get paid out.
Where the World Bank bonds, issued by the International Bank for Reconstruction and Development (IBRD), differ is they’re designed to pay out to the 76 poorest countries during a pandemic, rather than after, to help pay for relief.
Of the bonds issued, one tranche of $US250m was mainly for flu but included coronaviruses, and the riskier $95m tranche was to cover coronaviruses, filovirus, Lassa haemorrhagic fever, Rift Valley fever and Crimean Congo haemorrhagic fever.
The World Bank estimated that had its Pandemic Emergency Financing Facility (PEF), which included the bonds, been running in 2014, it could have mobilised $100m soon after the Ebola crisis started, saving many lives and reducing the estimated $2.8bn cost to the West African economies affected.
The World Bank bonds are now on the cusp of being triggered by the COVID-19 outbreak, which two nights ago was officially classified as a pandemic by the World Health Organisation (WHO).
The bonds pay out 12 weeks after a pandemic starts, if a number of other conditions are also fulfilled such as geographic spread of a disease, number of deaths and new cases, and whether it’s still growing in severity.
That means the 2017 pandemic bonds could pay out on March 23.
The bigger Tranche A bond requires more than 2500 deaths with 20 outside the country of origin, and the smaller Tranche B bond requires 250 deaths with 20 outside the origin nation.
If it does pay out, Tranche B investors will lose all of their principal and Tranche A investors will lose 16.7 per cent or $US132.5m, the amount set aside for coronaviruses in that bond.
According to Bloomberg, the riskier of the two tranches of bonds are currently being sold for less than 10 per cent of their value now, suggesting investors are convinced they’ll be paid out. Two weeks ago they were selling for 60 per cent of face value.
The World Bank has paid out $US96m worth of interest on the bonds, from a pool of $US117m set aside for those payments, according to the Financial Times.
There isn’t much in the way of disaster investing for smaller players, even among the online betting sites.
The only ‘Pandemic’ they’ll find in the online betting sites is the one running the Galaxy 1100m in Sydney in two weeks — his odds are not looking good either.