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Coronavirus Pandemic Bond Payouts Likely to Be Held Up By Fine Print

Transmission electron micrograph of SARS-CoV-2 virus particles, isolated from a patient. Image captured and color-enhanced at the NIAID Integrated Research Facility (IRF) in Fort Detrick, Maryland. Credit: NIAID

Investors are looking at big losses in two “pandemic bonds,” issued by the World Bank’s International Bank for Reconstruction and Development (IBRD) in 2017, which were designed to pay out funds to countries that need help to contain a pandemic.1

The global COVID-19 pandemic will almost certainly trigger the riskier of two tranches of catastrophe bonds sold three years ago to raise emergency funds for poor countries with weak health infrastructure. The decision rests with AIR Worldwide Corp., a Boston-based firm tasked as arbitrator when an 84 day period from the start of the outbreak at the end of last year expires on March 23, starting a process that could potentially unlock $132.5 million in funds.2

But hospitals in the developing world probably won’t see the money until at least May 15, almost two months later, because of terms written into the securities’ structure, according to two people familiar with the matter.2

AIR is due to deliver a report to the World Bank which clarifies any payouts and when they will be imposed on April 9. That’s too close to the monthly coupon date for a payment in April.2

The securities are structured so that they are written down following outbreaks of certain diseases named as covered perils. The quoted price of the $95 million risky “Class B” portion of the debt means investors think a wipeout is all but inevitable when a mandatory period since the start of the outbreak expires on March 23.2

Pricing for the less risky bond has probably fallen less than 50%, said Marcos Alvarez, senior vice president and head of insurance — global financial institutions at DBRS Morningstar. Pricing information on these bonds is not public as they were privately placed three years ago.1

Taxpayers in Australia, Germany and Japan and the International Development Association, meanwhile, have put up about $176 million so far to back the bonds.3

In a 2019 paper published in the BMJ, Clare Wenham of the London School of Economics and a colleague found that as of last year, the pandemic bonds had paid nearly $115 million to investors while providing only $61 million via a “cash window” mechanism to Congo, for its most recent Ebola epidemic.3

Wenham said the payout conditions are too arbitrary and long. “By the time the required number of people die in a certain number of countries, the pandemic is clearly going to have spread quite significantly,” she said, describing the mechanism as “flawed” and overcomplicated.3

1. Investors in World Bank’s ‘Pandemic Bonds’ Face Big Losses Due to the Coronavirus Outbreak CNBC

2. Pandemic Bond Payouts Likely to Be Held Up By Fine Print Bloomberg

3. Pandemic Bonds Prove Good for Investors, Less So for Nations Associated Press

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