The World Health Organization (WHO) declared on Wednesday that the outbreak of the coronavirus is now a pandemic.
In previous outbreaks, developed countries have tended to better cope with outbreaks compared to developing countries. For example, the Ebola outbreak in West Africa during 2013-2016 killed more than 11,300 people, as the region did not have the funding to contain the situation. This is why the World Bank came up with Pandemic Bonds in 2017 in order to channel much needed funding to where it is most needed during such an outbreak. Covid-19 is now one such disease.
Pandemic bonds are designed to make payments to developing countries when an outbreak reaches a certain level, with investors betting against it. With the WHO declaring the coronavirus outbreak a pandemic, there is a possibility that the bonds will now be paid out and some pandemic bondholders are not going to be happy.
The first set of pandemic bonds were earmarked against influenza, Ebola, and dengue outbreaks and are categorized in to two classes, A and B, with a maturity of three years and a combined value of US$425 billion. A pandemic bond is similar to a Basel III bond, where principle may be written off as bad debts if certain criteria are reached.
Conditions to writing off capital as bad debts for pandemic bonds are dependent on the number of casualties from an outbreak in each country and a certain timeline. This is why interest rates for pandemic bonds are higher than other bonds with the same maturity in order to compensate for the higher level of risk.
The WHO issued two sets of pandemic bonds in 2017. These included the Class A bonds with par value of US$225 million to be paid at a 6.9 per cent interest rate, but designed to leave bondholders with nothing if 2,500 people died from a pandemic in a single country and at least 20 more deaths occurred elsewhere.
The other set is the Class B bonds with par value of US$95 million to be paid at a 11.9 per cent interest rate, but the triggering event is 250 deaths, with scaled defaults that depend on how many countries worldwide have seen at least 20 deaths from the outbreak. Most of the buyers of pandemic bonds were institutional buyers because they can handle more risk than retail buyers.
So far, the World Bank has yet to pay out any affected countries because there is a waiting period of 12 weeks from the triggering event. With the coronavirus outbreak first reported in December, the technical default wouldn’t occur until April. This means that this capital would not be available until four months after the outbreak was apparent, despite the fact that it was designed to help countries cope with an outbreak from the start.
This type of situation has happened before – during another Ebola outbreak in Africa in 2018 during which more than 2,200 people died in the Democratic Republic of the Congo (DRC) and 20 more died in neighbouring countries. The pandemic bonds were not paid out that time because the number of casualties did not reach the 2,500 mark. The DRC needed more than US$557 billion to cope with the outbreak two years ago.
The pandemic Class A and Class B bonds that have been sold since 2017 will reach maturity on July 15, and investors are hoping that the pay outs will happen without principle being written off as bad debts because of the coronavirus outbreak.
The Thai Bond Market Association said in its related blog on Thursday that the issuer of the bonds should learn from the previous pandemic bonds. New criteria should be considered for the new round of pandemic bonds in order for them to be a more effective tool to fight against future outbreak from the start, not three months after.