【ESG Investment Insights】What is pandemic bond, and will the bond help in the battle against Covid-19?
Introduction
Countries across the world have already spent over trillions of dollars in addressing the impact of COVID-19 in recent months. Thus attempts made at slowing the spread of the virus is proving to be costly. The World Bank has recognised that developing countries are particularly vulnerable when a pandemic strikes due to lack of financial resources.
The pandemic bond has come under the spotlight recently as COVID-19 continues to spread, but no funding from the bond has been released yet. So what exactly is the pandemic bond and will it help in the battle against COVID-19?
What is the pandemic bond?
The World Bank first introduced the pandemic bond in 2017. The aim of the bond is to provide financial support to the Pandemic Emergency Financing Facility (PEF), a facility created by the World Bank as a response to the Ebola outbreak. PEF will efficiently provide funding to developing countries when facing the risk of a pandemic.
How does pandemic bond work?
The pandemic bond is designed to attract a wider and more diverse set of investors. The idea behind the bond is to sell to private sector investors with the promise of a yearly return. Investors losses will depend on the number of deaths and geographical spread, which can potentially wipe out bondholder’s entire investment.
How does COVID-19 affect pandemic bond prices?
During a pandemic, investors are at risk of losing their principal amount. The price of the World Bank’s pandemic bond has dropped with each major disease outbreak, including the recent COVID-19. With the number of cases of COVID-19 surging, prices of the bond have plunged. The pandemic bond offers investors with high-interest payment in return for taking the risk of losing their investment if a pandemic occurs.
Figure 1: Pandemic bond plunges with each new disease outbreak (source: CBC News, Bloomberg, SwissRe)
What are the types of pandemic bonds issued by the World Bank in 2017?
Two tranches of pandemic bonds issued by the World Bank in 2017:
● Class A bond with a par value of $225 million paid a 6.9% interest rate. The bond defaults if pandemic-related death reaches 2,500 in a single country with at least 20 or more deaths confirmed in an overseas country. The funding will be used to support developing countries.
● Class B bond with a par value of $95 million paid an 11.9% interest rate. The bond has a lower bar for the debt to trigger with higher interest rate. The bond defaults if pandemic-related deaths reach 250 with at least 20 or more deaths confirmed in an overseas country.
According to the terms of the bond, a maximum of $195.8 million in assistance will be available to countries in the case of a pandemic, and the maximum that investors will lose is $132.5 million. The bonds are due to mature in July 2020.
Why the pandemic bond issued by the World Bank came under fire?
The pandemic bond came under pressure as the terms to trigger a payout are complex. The bond has a long list of criteria that need to be met before the payout, ranging from the rate of fatality to the geographical spread of the disease.
Under the payout terms of the pandemic bond issued by the World Bank, the terms require a waiting period of 12 weeks from when the outbreak first began. With COVID-19 having first been reported toward the end of December 2019, the payout is expected to be in early April. Even when the number of deaths and geographical spread of COVID-19 has met the criteria, no payout has been forthcoming to developing countries yet.
Besides, only specific developing countries are eligible for the funds. For example, the hardest-hit countries including USA, China, Italy, Spain and South Korea are not covered by the funding. Even if eligible countries do end up receiving funding from the payout, it will be a relatively trivial sum when compared with the estimated damage to the country’s economy.
Conclusion
The pandemic bond is a creative financial instrument designed to engage private sector investors to support developing countries when facing the risk of a pandemic. Nevertheless, the bond is not designed to support developing countries in the prevention of an outbreak, as the funding they receive only materialises at a latter stage of the pandemic. From the public health perspective, it seems that direct funding to improve the healthcare system and pandemic prevention could be a considerably more effective way to support countries in need.
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Reference：
1.“World Bank Launches First-Ever Pandemic Bonds to Support $500 Million Pandemic Emergency Financing Facility”, the World Bank,
https://www.worldbank.org/en/news/press-release/2017/06/28/world-bank-launches-first-ever-pandemic-bonds-to-support-500-million-pandemic-emergency-financing-facility
2.“When will coronavirus Covid-19 trigger the World Bank’s pandemic bond?”, Euromoney,
https://www.euromoney.com/article/b1klyqsykl0d0m/when-will-coronavirus-covid19-trigger-the-world-bank39s-pandemic-bond
3.“Pandemic bonds were supposed to fund the cost of fighting the coronavirus – so why aren’t they paying off?” CBC,
https://www.cbc.ca/news/business/pandemic-bonds-1.5469646