Tasos Vossos and John Lauerman Bloomberg April 10, 2020
(Bloomberg) --
The outbreak of coronavirus failed to trigger payouts from bonds that the World Bank issued to provide emergency pandemic resources, even after almost 100,000 global deaths from Covid-19.
The highly contagious coronavirus outbreak, deemed a pandemic a month ago by the World Health Organization and the cause of a global economic downturn, is not enough to trigger payouts from the World Bank’s pandemic bonds, an independent arbiter decided on Thursday.
AIR Worldwide Corporation published its so-called eligible event report, determining that the outbreak hadn’t met the “exponential growth rate” criterion in eligible countries, the World Bank said in a statement dated April 9. The determinations are final and binding on the World Bank and the investors. A World Bank spokesperson was not immediately available for comments.
AIR is continually reviewing the situation and will issue its next report on April 17.
The decision follows months of speculation on whether holders of the high-coupon bonds would finally take a hit to free up cash for struggling health systems. Poor countries that stand to benefit from the bonds are under increasing threat as the number of cases in Africa now exceeds 12,000, with more than 600 deaths.
“You can see the thing coming like a train, and these countries are going to need a response,” including patient testing and isolation, said Andrew Farlow, an economist at the University of Oxford who studies pandemics. “It’s bizarre and counterproductive that you have to wait.”
The bonds have drawn criticism for their arcane structure and a rigid process that took 122 days since the start of the outbreak to lead to a decision, which ended up blocking funds for struggling health systems anyway.
“Even if the bonds paid out as much as possible, payouts will have been too expensive, too slow and too small” said Dr Felix Stein, a senior research fellow at the University of Edinburgh. “The PEF did not work, even before the Covid-19 pandemic struck,” he said.
A writedown would have resulted in about $132.5 million moving to the World Bank’s Pandemic Emergency Financing Facility, becoming available for poor countries eligible for funding from the International Development Association. Investors have been receiving coupons of 6.5% over six-month Libor on the safe $225 million tranche and 11.1% above Libor on the risky notes ever since the bonds were issued in July 2017.
Bondholders this week were divided on the outcome before AIR released the report. One asset manager’s internal calculations pointed to a writedown, while another thought the growth rate was still not sufficient to trigger losses.
Prices on the secondary market suggested that a writedown was imminent, with the risky tranche indicated at mere cents on the dollar in March. The pandemic bonds are illiquid and prices typically come from a handful of specialized dealers.
The World Bank began selling the high-yielding securities a year after the most severe outbreak of Ebola virus on record ended in 2016. They’re modeled on catastrophe bonds that pay out in response to insurance claims for events like hurricanes.
The bonds are triggered by patterns in deaths from certain infectious diseases. Critics have said that they’re structured in a way that makes payouts late and unlikely.
“With epidemics like this, it’s extremely important to stop them as soon as possible, to stop them early because of the exponential growth that can occur,” said Olga Jonas, a senior fellow at the Harvard Global Health Institute in Cambridge, Massachusetts, who was previously the World Bank’s economist coordinating avian and pandemic influenza.
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