World Bank’s pandemic bonds sink as coronavirus spreads

Investors dump debt designed to pay out when developing nations face serious outbreaks

Investors are betting that a special pandemic bond issued by the World Bank will pay out relief funds to countries affected by the coronavirus, as the death toll from the outbreak continues to mount.

In 2017 the Washington, DC-based institution issued two classes of pandemic bond worth a total of $320m, in a deal designed to help developing nations facing a serious outbreak of infectious disease. The bonds deliver interest payments to investors, funded by donor nations Japan and Germany, until certain trigger conditions are reached. At that point the bonds are not repaid in full and the money is used instead to help tackle the crisis.

For the riskier of the two bonds to pay out (“Tranche B”), the disease must cross an international border and there must be at least 20 fatalities in the second country. Those bonds are trading an average of 57 cents on the dollar, according to an aggregate of four dealers, suggesting that a payout is likely. So far, there have been 34 deaths outside mainland China, 12 of which were in Iran, eight in South Korea, five in Italy and four in Japan.

The other tranche, which requires there to be 2,500 deaths in developing countries to trigger a payout, is still trading close to par.

“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.

The bonds represented an attempt by the World Bank to use global capital markets to change the face of aid and development, but have come under scrutiny for allowing investors to enjoy high double-digit coupons while outbreaks afflict the developing world.

The bonds have not been triggered to date, despite serious bouts of Ebola and other diseases. Now, as the coronavirus outbreak spreads, critics say that any payments to areas affected would be too little, too late. The riskier of the two bonds requires 12 weeks to have passed since the initial outbreak — a milestone which will be reached on 23 March — and for 250 deaths to have taken place in the country of origin. Almost 2,600 deaths have so far been recorded in China.

“The terms are too stringent; it shows how useless this instrument is,” said Bodo Ellmers, director of Global Policy Forum’s sustainable development finance programme. “You obviously want to prevent a pandemic but it only pays out when it becomes a pandemic, that’s the fundamental flaw,” he said.

Pandemic bonds are closely held and largely illiquid. Filings collated by Bloomberg show that Tranche B, which matures on June 15, is held by asset managers including Baillie Gifford, Amundi and Stone Ridge Asset Management.

The biggest cluster of the virus outside of China is on a cruise ship docked in the Japanese port of Yokohama, where there are more than 600 confirmed cases among almost 4,000 passengers. Three people on the ship are reported to have died.

Fatalities in any country count towards the trigger conditions but one of the countries affected must be eligible for funding by the International Bank for Reconstruction and Development, the World Bank’s lending arm. China qualifies on those grounds, according to the World Bank.

“A payout is much more likely than it has been at any point previously,” said one investor in the Tranche B bond, which pays a coupon of 11.1 per cent over Libor. “If it’s going to happen, the sooner the better,” the investor added, noting that “it’s important not to lose sight of the human cost”.

Source: Financial Times

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