PEF cat bond threat rises as risk of Congo Ebola spread now “very high”

by Artemis on November 27, 2018

The number of deaths confirmed by the World Health Organisation (WHO) from the latest Ebola outbreak in the Democratic Republic of Congo has risen again and the risk of the outbreak spreading to a neighbouring country is said to be very high, all of which heightens the risk for the World Bank’s pandemic catastrophe bond.

When we last covered the ongoing Ebola outbreak the number of confirmed deaths had reached 154 as of November 8th.

As of November 20th that number has risen further to 172 confirmed and 47 probable deaths, out of 386 cases, 339 of which are confirmed by the WHO.

As we said previously, this latest outbreak of the Ebola virus in the Democratic Republic of Congo may be considered a qualifying or eligible event under the terms of the coverage provided by the Class B tranches of pandemic swaps and catastrophe bonds that were issued through the Pandemic Emergency Financing (PEF) transaction by the World Bank’s International Bank for Reconstruction and Development (IBRD) last year.

The PEF’s so-called insurance window amounts to $425 million of protection, made up of $320 million of IBRD CAR 111-112 capital-at-risk pandemic catastrophe bond notes which were sold to ILS investors, along with $105 million of pandemic risk linked swaps (derivatives), also sold to investors to expand the transaction to those seeking a different risk-linked asset.

It is the number of confirmed deaths reported by the WHO which is vital to understanding the risk of this pandemic cat bond being triggered.

With that figure still rising the risk that the World Bank’s pandemic catastrophe bond gets triggered has risen.

The PEF pandemic catastrophe bond can be triggered and payout for a Filovirus like Ebola once the number of confirmed deaths passes 250, but it must also have had a wider impact than to just one country.

Hence, for the pandemic cat bond to be triggered the Ebola outbreak must spread to a neighbouring country, something that the WHO has confirmed is possible.

“The risk of the outbreak spreading to other provinces in the Democratic Republic of the Congo, as well as to neighbouring countries, remains very high. Over the course of the past week, alerts have been reported from Uganda and Zambia,” the WHO said in its latest update.

So far those alerts have proved not to be confirmed as cases of the Ebola virus, but it may just be a matter of time as this outbreak keeps spreading within the DRC and cases move closer to the borders with Uganda, Rwanda and South Sudan.

The payout from the pandemic World Bank cat bond would be a 30% loss of principal if between 250 and 750 deaths are confirmed and the Ebola outbreak has spread to another country as well.

The $95 million Class B tranche of pandemic cat bond notes have been marked down on some broker secondary market pricing sheets recently, with some discounting the tranche of notes by as much as 20% due to the increased risk and potential for them to face a loss should this ongoing Ebola outbreak worsen and spread to another country in the region.

So the market sentiment for these notes has worsened as well, along with the continued development of this outbreak and the rising chance of international spread, suggesting the threat to the PEF cat bond notes has risen as well.

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