An inside look at the debate around pandemic bonds, which have $425 million hinging on how deadly the coronavirus ends up being
- Investors holding the World Bank's pandemic bonds stand to either reap massive profits or lose hundreds of millions of dollars, depending on the coronavirus outbreak's lethality.
- The instruments offer higher-than-average returns, but bondholders will lose their principal in the event of a qualifying pandemic.
- If certain criteria are met, the payment is sent to the World Bank's Pandemic Emergency Financing Facility to fund relief efforts.
- The bonds are a novel way to connect the financial sector with epidemic relief and "potentially save millions of lives," the World Bank's president said in a 2017 statement.
- Others aren't so sure of the assets' effectiveness in curbing an outbreak.
- The bonds' triggers "are very late," and the organization could've funded relief efforts without the "unnecessary, inappropriate, and ineffective risk-financing instruments," Olga Jonas, senior fellow senior fellow at the Harvard School of Public Health, told Business Insider.
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A group of unique bondholders will either reap massive profits or lose hundreds of millions of dollars as the coronavirus outbreak escalates.
So-called "pandemic bonds" were first introduced by the World Bank in 2017 as a response to the Ebola virus. Investors holding the bonds enjoy higher-than-average interest rates, but stand to lose their cash in the event of a pandemic.
If certain criteria are met, the bonds' principal is transferred to the World Bank's Pandemic Emergency Financing Facility (PEF) to fund containment and relief efforts.
"We are leveraging our capital market expertise, our deep understanding of the health sector, our experience overcoming development challenges, and our strong relationships with donors and the insurance industry to serve the world's poorest people," Jim Yong Kim, World Bank Group's president, said in a 2017 statement, adding that the PEF can "potentially save millions of lives."
The bank issued two tranches of pandemic-linked bonds and derivatives collectively worth $425 million in 2017. Bondholders enjoyed more than two years of strong returns and little to worry about as few outbreaks came close to triggering the bonds' total default.
But the stability of the investment has suddenly been thrown into question as the deadly coronavirus spreads globally.
Triggers for the two classes of bonds
The two tranches of pandemic bonds represent different risks of contagion. The World Bank offered $225 million worth of Class A debt, which pay out 6.9% annually. The bonds default if pandemic-related deaths reach 2,500 in a single nation with an additional 20 or more deaths confirmed in an overseas country, according to the bank's prospectus.
The Class B bonds have a lower bar for the debt to trigger and accordingly boast a higher interest rate, since holders are assuming more risk. The bonds pay 11.5% annually, but reach default after 250 deaths. The bonds' payout rate scales with the number of additional countries that experience than 20 confirmed deaths. The World Bank issued $95 million worth of the Class B assets.
The coronavirus outbreak has so far killed more than 1,370 people and infected more than 60,000, surpassing SARS in lethality earlier this month. Still, Singapore, Thailand, Japan, and Korea are the only nations currently hosting more than 20 infected individuals.
Debate over the bonds' efficacy
While the World Bank touts the debt as an efficient way to connect financial markets with epidemic relief, others have their doubts that the bonds help ailing nations at all. The assets' lengthy prospectus hides numerous requirements that gum up any effort to release funds when they're most needed, according to Olga Jonas, senior fellow at the Harvard School of Public Health and former World Bank economist.
Funds can only be released from the PEF for non-flu epidemics 12 weeks after the "start of the event," according to a World Bank document. The novel coronavirus strains were first reported on in late December, leaving funds locked up until late March.
Even once the deadline is met, the outbreak has to cause at least 20 deaths in two or more countries to trigger the bonds. While China reached the fatality threshold weeks ago, no other nation is close, leaving the PEF frozen while the virus continues to spread.
"The advertising was that there would be early, rapid, predictable, transparent financing available for outbreaks so that they don't become pandemics," Jonas told Business Insider in an interview. "In order for that to happen you have to have early triggers. The triggers in the design are very late."
A "distraction" from "getting serious"
Jonas alleges that the World Bank didn't even need to issue bonds to better prevent pandemics. The former economist called the instruments a "distraction" from "getting serious about supporting preparedness" in developing countries. The $500 million made available through the PEF is a paltry sum compared to the tens of billions of dollars the World Bank holds in liquid assets, she added.
"The money on the table from [the World Bank's International Development Association] didn't need to transit the PEF - and it certainly should not be paying for an unnecessary, inappropriate, and ineffective risk-financing instrument," Jonas said.
She added: "If you were doing this with your own money at home, that'd be grounds for divorce."
Even in the case of the bonds being triggered, Jonas doesn't expect the funds to do much good. The PEF's insurance window covers up to $500 million through its bond and swap issuances, but allocates only as much as $196 million for coronavirus outbreaks.
Once released, 76 countries can apply to receive the pandemic relief funds, watering down the total amount sent to each country. Compared to the $10 billion China is spending on virus control today, the amounts that could be released by the PEF are "trivial," Jonas said.
The bonds would've been useful "if you are not able to finance the risk otherwise," she added. "The World Bank has excellent capacity to finance the risk otherwise."
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