Waiting game continues for pandemic bonds payout

Poor countries affected by the coronavirus outbreak will have to wait until the middle of next month to find out if the World Bank’s specially designed “pandemic bonds” will release funds to help fight the disease. Some investors are questioning whether they will pay out at all.

The bonds require 84 days to have passed since the outbreak date determined by the World Health Organization, which is a milestone that will be reached on March 23. But the World Bank says it will take a further two and a half weeks to determine if the final trigger conditions for the bonds have been met, meaning investors and governments will find out on April 9 at the earliest.

Two classes of bonds were issued by the Washington DC-based institution three years ago, in a $320m deal designed to help developing nations facing a serious outbreak of infectious disease.

The bonds deliver interest payments to investors, funded by donor nations Japan, Australia and Germany, until certain criteria are reached. At that point, investors are not repaid in full and some of the funds are used instead to help tackle the crisis.

The bonds “are a gimmick,” said Olga Jonas, a senior fellow at Harvard’s Global Health Institute, who worked at the World Bank for 33 years. “It’s fairly obvious that these triggers are too late to stop an outbreak early.” 

Investors are already bracing for steep losses as all but two of these conditions have been reached; among them, a minimum of 2,500 deaths, and more than 20 of them outside of the country of origin. The World Bank’s external modelling agent, Air Worldwide, now has to determine that, on March 23, the pandemic was growing at a rate above zero in countries poor enough to be eligible for funding, and that 20 per cent of total reported cases have been confirmed.

David Strasser, senior portfolio manager at Zurich-based Plenum Investments, which invested in one class of the bonds, noted that the pandemic’s growth has largely been halted in countries eligible for support from the International Bank for Reconstruction and Development (IBRD) or the International Development Association (IDA). However, the growth rate is surging in richer countries that are not eligible.

“If this continues, we might be in a strange situation where the bonds don’t actually trigger,” he said.

But most are betting that the criteria will be met. If so, investors in the riskier Tranche B class of the bond — which is now pricing at 13 cents on the dollar, according to an aggregate of four dealers — are set to lose all of the $95m they invested. Investors in Tranche A, which is now pricing at 84 cents on the dollar, can lose a maximum of 17 per cent of their initial investment, which totalled $225m. Both mature in July.

“At this point there is no doubt that the bonds will trigger,” said Marcos Alvarez, senior vice-president of global financial institutions at DBRS Morningstar. “But they should have triggered them earlier, especially in a case where you’re talking about a global pandemic, which we knew it was a week ago.”

By the end of last month, the World Bank had paid out more than $96m in interest, according to a person familiar with the bonds — more than half of the $181m received from the original donor nations.

The World Bank has defended the structure of the bonds, saying that they are just one tool in its arsenal to protect the poorest countries in cases of the most severe pandemics. The institution has so far pledged $14bn in funding for countries to improve their responses to the outbreak.