Pandemic cat bond remains at-risk as Ebola virus spread continues

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The World Bank’s pandemic catastrophe bond remains at-risk as the spread of the Congo Ebola virus disease outbreak continues and agencies look nervously at borders in the region, with the risk of international transmission considered very high.

At the latest count the World Health Organisation (WHO) has confirmed 640 Ebola virus disease cases and importantly for this pandemic catastrophe bond and the risk of it triggering the number of confirmed deaths has now reached 373.

While the number of confirmed deaths is now well above the trigger attachment point of 250 for the $95 million of Class B notes from the Pandemic Emergency Financing (PEF) transaction by the World Bank, the Ebola outbreak still needs to spread to another country before the tranche will begin to face any loss of principal.

Under the terms of the PEF cat bonds Class B notes, a Filovirus disease (which Ebola is classified as) must cause over 250 confirmed deaths and affect more than one worldwide territory before any payout is triggered.

Hence this outbreak must spread internationally across borders before the cat bond notes will make any payout and investors lose any principal.

Alerts on the potential spread of the Ebola virus have already been responded to in Uganda and Rwanda in recent weeks, with Sudan also considered a country at risk of spread.

But so far, all alerts outside the outbreak affected areas have been ruled out and the spread has been contained to within the Democratic Republic of Congo (DRC) itself.

The disease is spreading though, within the DRC and the WHO cites concerns over its spread to new health zones in the country.

Insecurity in the DRC and surrounding countries is exacerbating the risk of international spread, as significant numbers of people are travelling to avoid conflict and issues related to the DRC’s recent elections.

The WHO says, “the risk of national and regional spread is very high” explaining that neighbouring countries to the Congo need to intensify preparations to enhance surveillance and preparedness.

There are concerns as the Ebola spread is taking it nearer to more major population centres, which in the currently insecure environment of the DRC means the chances of spread continue to rise.

NGO’s say that unless the response to the Ebola outbreak ramps up and gains more control over the spread of the virus disease it is likely to find its way into a neighbouring country.

That would trigger a payout of the cat bond, if 20 or more confirmed deaths are reported in any neighbouring country.

If the current outbreak does spread into any neighbouring country and cause a sufficient number of deaths, then a payout of 30% of the $95 million Class B principal, so $28.5 million, would come due, we understand. In order for a large payout to come due the total number of confirmed deaths would need to surpass 750 for a 60% loss of principal, or 2500 for a 100% loss.

Catastrophe bond traders in the secondary market still have this Class B tranche of the PEF cat bond marked down for a potential loss. At the moment it is marked down for bids of around 75, but one broker pricing sheet has it marked down to below 40 cents on the dollar, we understand.

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