“ bond”: marketing gadget or useful financial instrument?

By Sebastien Meunier, Director, New York office Chappuis Halder & Co.

More content on www.chappuishalder.com “Pandemic bond”: marketing gadget or useful financial instrument?

In June 2017, the issued two bonds destined to cover developing countries against the risk of pandemic outbreaks:

Bond Class A Bond Class B Filovirus, Coronavirus, , Rift Valley Perils covered Filovirus, Coronavirus Fever and Crimean Congo Hemorrhagic Fever Size ($m) 225 95 Coupon rate 6.50% 11.10% July 15, 2020 extendable July 15, 2020 extendable Maturity monthly up to a maximum monthly up to a maximum of 12 months of 12 months 95 if IDA deaths < 250 187.5 if IDA deaths > 2,500 0 if IDA deaths > 2,500 Redemption ($m) Else 225 Else from 12 to 59 depending on factors

The firms involved in structuring and managing the bonds were Swiss Re and Munich Re, AIR Worldwide, and GC Securities. The bonds attracted the interest of institutional and private investors, including Baillie Gifford, Amundi and Stone Ridge Asset Management, who ordered two times the amount being offered.

Purpose & Benefits

The benefits of using those financial instruments are: • For the World Bank to build an emergency fund from private investment; • For the 75 eligible countries members of the International Development Association (IDA) to get “quick” financial help if hit by a pandemic; • For investors to get an interest rate far above regular interest rates for three- year debt at the time the bonds were issued, with the opportunity to get the principal back after 3 years – all of it, a part of it or none of it – depending on the occurrence and strength of a pandemic.

Basically, the amount of. money that would be made available to IDA countries is based on the number of deaths in those countries (thresholds of 250, 750 and 2,500), which is macabre and sensible at the same time. But it’s not that simple.

March 2020 “Pandemic bond”: marketing gadget or useful financial instrument?

The triggers are based on the duration of the outbreak, the number of cases and geographic spread, the number of deaths, the growth rate and confirmation ratio of the disease. The scenarios for global or regional spread that would trigger the bonds are laid out in a 386-page prospectus!

We will know by mid-April 2020 if the current Coronavirus outbreak triggers the bonds. Investors expect so, as class B was trading at 10% of its face value on March 11th according to Bloomberg.

Issues

The pandemic bonds have been criticized: • For their stringent conditions: the 2018 , the second- largest Ebola outbreak in recorded history that killed 2,264 in the Democratic Republic of Congo did not meet the conditions of the bonds; • For their impact: the bonds require a waiting period of 12 weeks from when the triggering outbreak began. At that time the funds are still useful but it’s already too late to help contain the pandemic, defeating one the purposes of the fund; • For their economic efficiency: around ~$96m of coupons have already been paid to the investors according to FT, and the maximum amount of money that can be triggered is $132.5m! It’s probably not the optimal way to raise funds, especially when the World Bank’s total disbursements in 2019 were $49B and that it already committed $14B of financing to fight the COVID-19 …

The World Bank is planning to issue a new generation of pandemic bonds by summer 2020. It is expected that the lessons of the Ebola and the ongoing COVID-19 outbreaks will be considered, and that the new bonds’ parameters will be less stringent and less favorable to investors.

Everybody be safe out there!

Sebastien Meunier, Director, New York Office, Chappuis Halder &Co.

Sources: 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 https://www.ft.com/content/a6239e12-5ec7-11ea-b0ab-339c2307bcd4 https://www.bloomberg.com/news/articles/2019-08-14/ebola-bond-pays-investors-millions-while-congo-battles-outbreak https://www.bloomberg.com/news/articles/2020-03-11/pandemic-bond-investors-brace-for-wipeout-as-coronavirus-spreads

March 2020