Pandemic Bonds Investors Stand To Lose $132.5 Million
Pandemic bonds issued by the World Bank are failing under the weight of a globally spreading coronavirus pandemic, and its investors are losing huge amounts of money as a result.
According to a report issued by CNBC, the two bonds, which offer very high returns for their high-risk investment strategy, are fast plunging. And investors are fleeing as infections continue to increase globally.
One of the riskier bonds, class B, is on the verge of losing its investors. All their invested capital as it has reportedly dropped by as far as 80% in prices, According to a report by DBRS Morning Star rating agency.
Less than two weeks ago, the DBRS had estimated that the Coronavirus outbreak would result in huge payouts amounting up to $132.5 Million in “pandemic catastrophe bonds payout.” DBRS stated:
“Eligible countries will receive funding to mitigate the impact of the outbreak. And might validate the need for market-based mechanisms to deal with pandemics.”
Both Class A and Class B IBRD Pandemic Emergency Financing (PEF) investors are Losing Heavily
The pandemic bonds, issued by the World Bank, is meant to fund developing countries to fight the spread of infectious diseases.
First established in 2017 by the International Bank for International Reconstruction and Development (IBRD) in collaboration with the World Health Organization to fight against the Ebola Outbreak in Africa, the bonds are meant to “prevent rare, high severity disease outbreaks from becoming pandemics.” A statement by the World Bank’s press release said:
“The PEF will provide more than $500 million to cover developing countries against the risk of pandemic outbreaks. Through a combination of bonds and derivatives priced today, a cash window, and future commitments from donor countries for additional coverage.”
The IBRD pandemic bonds distribution is divided by investor’s type and the location to class A with a total allocation of $225 million and Class B with $95 million.
Parametric Triggers for Both Bonds Include Outbreak Size, Growth Rate and Spreading Across Borders
Financing to eligible countries according to the World Bank, would be triggered. WHO says, “When an outbreak reaches predetermined levels of contagion, including a number of deaths; the speed of the spread of the disease; and whether the disease crosses international borders.”
BDRS added that “the typical investor in catastrophe bonds is attracted to his asset class because it is generally uncorrelated with the general markets. However, the current coronavirus outbreak shows the valuation of pandemic bonds. It is highly correlated with the performance of global financial markets when it matters most.”
DBRS, through their Senior Vice President, Marcos Alvarez, estimates that the riskier bond’s prices are could fall up to 80%. While the other class of bond has fallen by almost 50%. In an earlier report this month the firm had stated;
“Similar to other catastrophe-linked bonds in the market, investors could lose their principal if a set of parametric triggers, such as outbreak size, growth rate and spread across borders, are met.”
Are The Bonds’ Parameters Working For Coronavirus Mitigation Efforts?
The Class A bonds would require the outbreak to cause over 2,500 deaths. Last for more than 12 weeks and cause more than 20 deaths in the second country. This would trigger a payout to affected countries, causing investors to lose 16.67% of their investment. According to this calculation, 12 weeks ended on March 23. Counting from December 31, 2019, as the start date of the outbreak, according to the World Health Organization.
Class B bonds, which are the higher risk bonds, would require fewer fatalities, 250. As well as the rest of the conditions in Class A, and investors would lose all the principal amount. DBRS stated;
“As of the date of this commentary, this would be the case for Class B investors. Bringing the total amount available in the PEF to 132.5 million; however, a larger coupon compensates for these higher risks associated with the Class B Notes.”
Despite the clearly outlined conditions for payouts, critics have questioned the ability of the bond payouts to help countries in need, to their economy and preventive measures. BDRS pointed out:
“Similar to other catastrophe bonds, defining parametric triggers is not an easy task, and IBRD pandemic bonds are no exception. Public health experts object pandemic bonds do not really help poor countries. They do not help prevent an outbreak as funding might be available too late.”
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