Due for redemption in July, the two pandemic bonds by World Bank worth $320 million have complicated payout triggers.
Even though the coronavirus pandemic has claimed more than 80,000 lives so far, the payout from the two pandemic bonds sponsored by the World Bank arm in July 2017 is yet to happen mainly due to the conditions outlined in the fine print.
The pandemic bonds, a novel funding mechanism set up by the lending arm of the World Bank, the International Bank for Reconstruction and Development (IBRD) in July 2017 and were expected to be redeemed in July 2020.
These bonds were conceptualised in the wake of the Ebola epidemic in Africa in 2015 as a means of providing surge funding to developing countries to cope with the pandemic.
The $320 million bonds were part of a larger $425 million total amount of risk transferred to the market through bonds and derivatives. This involved a concurrent $105 million swap with six reinsurance counterparties too.
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Vaccine development is a long, complex process. Unlike drugs that are given to people with a diseased, vaccines are given to healthy people and also vulnerable sections such as children, pregnant women and the elderly. So rigorous tests are compulsory. History says that the fastest time it took to develop a vaccine is five years, but it usually takes double or sometimes triple that time.
"This marks the first time that World Bank bonds are being used to finance efforts against infectious diseases, and the first time that pandemic risk in low-income countries is being transferred to the financial markets," stated the World Bank release at the time of the issuance.
Coronavirus as one of the most likely to cause a pandemic was among the six viruses covered.
The bonds were issued under IBRD’s “capital at risk” program. The interest rate for private investors was as much as 11% annually. The risk was, that they could lose some or all of their money in case a pandemic occurred in the following three years.
Since these bonds were privately placed, their pricing information is not publicly available. Yet, it is believed that the prices have dropped by 50-80% in the last couple of months as the coronavirus infection has become a full-blown pandemic.
The payout triggers involved a period of 12 weeks after the start of the outbreak (December 31, 2019) and the involvement of at least one among the 76 countries in the list of IBRD in the outbreak with a specified number of deaths.Confirmation of the growth rate of the infection was among the other conditions. If the payout is triggered in these specialised bonds, then some investors at least could stand to lose their entire investment.