IBRD CAR 111-112 – World Bank pandemic catastrophe bond

This is the first catastrophe bond issuance that will provide financial backing and insurance protection to the World Bank’s Pandemic Emergency Financing Facility (PEF).

The pandemic cat bonds are being issued through the International Bank for Reconstruction and Development (IBRD) global debt facility, while the beneciciary of the coverage is the PEF, which will receive injections of cash to support its work in assisting countries to stem or stop the spread of qualifying pandemics that occur.

The IBRD will issue two series of catastrophe-linked Capital At Risk notes (CAR Series 111 and CAR Series 112) through its debt issuance facility, which will be sold to qualified investors and insurance-linked securities (ILS) specialists.

The notes will provide parametric protection linked to the occurrence of specific pandemics, we understand, with any triggered default and payout designed to benefit the Pandemic Emergency Financing Facility (PEF) and provide the needed liquidity and capital to help stricken countries or regions in their response and recovery.

The proceeds from selling the two tranches of IBRD Capital At Risk notes will collateralize swap agreements that will be linked to the parametric payment terms for each tranche of notes.

The parametric trigger for both tranches of notes will be based on World Health Organisation (WHO) reported deaths and cases that hit the covered areas, which for some perils is global, others a subset of countries. The coverage is per occurrence and will run for a three-year term, we’re told.

The IBRD will issue a Series 111 Class A tranche of notes which we understand to be targeting at least $75 million of coverage that will be linked to the outbreak of pandemic flu or coronavirus events, we understand. The Class A notes have an attachment probability of 4.92% and an expected loss of 3.57%, with the pricing marketed at 7.25% to 8%, we’re told.

The Series 112 Class B tranche targets $25 million of cover or greater, we hear, but these notes are exposed to a wider range of pandemic perils, Coronavirus, Crimean Congo Hemorrhagic Fever, Filovirus, Lassa Fever and Rift Valley Fever. This tranche has an attachment probability of 9.44%, an expected loss of 7.74% and price guidance of 12.25% to 13%.

Interest payments to investors will be funded by donor contributions to the PEF Trust Fund and any payouts due to the either series of notes parametric triggers being breached by a pandemic will result in capital flowing to the PEF for it to use in helping affected countries slow the spread of an event and recover.

The World Bank’s first pandemic cat bond issuance to back the PEF is supported by major reinsurance players Swiss Re, Munich Re and reinsurance broker Guy Carpenter, with risk modelling from AIR Worldwide.

These notes will back the developing Pandemic Emergency Financing Facility (PEF) which is an initiative designed to rapidly disburse capital to countries in the event of deadly pandemics, with backing from risk transfer provided by the catastrophe bonds.

Update 1:

We’re told that the target size for the transaction has been lifted with as much as $400 million mooted, and a lower-end target of at least $175 million sought.

A Series 111 Class A tranche of notes had launched targeting at least $75 million of coverage that will be linked to the outbreak of pandemic flu or coronavirus events, but this tranche is now targeting from $150 million to $200 million of cover. This tranche had launched with price guidance of 7.25% to 8%, but this has dropped to below that range now at 7% to 7.25%, we understand.

A Series 112 Class B tranche was targeting $25 million of cover or greater, and the target is now set at between $25 million and $150 million, we hear. This tranche covers a wider range of pandemic perils, including Coronavirus, Crimean Congo Hemorrhagic Fever, Filovirus, Lassa Fever and Rift Valley Fever. As a riskier tranche of protection, these notes were offering price guidance of between 12.25% to 13%, but this has been lowered and tightened to 11.75% to 12.25%.

Update 2:

The targeted size range has narrowed to $175 million up to $350 million, we understand, while the spread guidance has dropped even further, now sitting well below where the initial pricing had been mooted.

The Class A tranche is aiming for $150m to $250m of notes issued. On pricing, this tranche has now dropped even further to 6.9% to 7%.

The Series 112 Class B tranche is now aiming for between $25m and $100m in size, we’re told. The pricing has now dropped again and narrowed to 11.5% to 11.75% we understand.

Update 3:

The transaction finally priced to offer $325 million of notes.

The Class A tranche of notes was priced to offer $225 million of notes to investors, with pricing of 6.9% we understand. The Class B, riskier tranche, priced offering $95 million of notes at a bond coupon and risk margin of 11.5%.

It’s also noteworthy that the World Bank sold $105 million of pandemic linked catastrophe swaps to capital market investors as well, in order to increase the reach of the transaction by helping other investors that preferred the derivative structure to access the risk as well.

The World Bank revealed the investor breakdown for the distribution of the bonds, see below:

Update, May 2018:

The Ebola outbreak in the Democratic Republic of Congo, Africa may prove to be an eligible event under the terms of the Series 112 Class B notes issued in this pandemic cat bond. The notes cover Ebola as a filovirus, but require a number of factors to be met, in terms of the number of deaths caused, the rate of spread and also the disease crossing borders, before any payout would be triggered.

Update, December 2018:

The number of confirmed deaths in the Congo Ebola disease outbreak has now passed the trigger point for a 30% payout of the $95 million of IBRD Capital-at-risk Series 112 Class B notes, but the notes have not yet been triggered as the other factors such as geographic spread across borders still haven’t been met.

Update, June 2019:

The risk that the World Bank’s pandemic catastrophe bond transaction triggers and makes a payout appears to have risen significantly, as the World Heath Organisation (WHO) reports that the Ebola outbreak in the Democratic Republic of Congo has now spread across the border to Uganda.

With almost 1,400 confirmed deaths now, should the $95 million of Class B notes be triggered it would result in a 60% loss of principal.

However, for any payout to be confirmed the spread still needs to meet a growth rate, in terms of the number of new cases confirmed. At this time no official determination has been made.

This cat bond was not triggered by the Ebola virus outbreak.

Update, February 26th 2020:

The pressure is rising on the World Bank’s pandemic catastrophe bond transaction as the novel coronavirus (2019-nCoV or Covid-19) spreads internationally and the number of deaths in certain countries around the globe nears the trigger point.

As of today, February 26th, there are said to be more than 81,000 cases of the coronavirus worldwide (over 78,000 of which are in China), with 2,763 deaths (2,715 in China). The WHO’s latest situation report from the 25th Feb. confirms 80,239 laboratory confirmed cases globally and 2,700 deaths.

It is the spread to countries such as South Korea, Iran and Italy that is raising concerns though, as there are now 11 deaths reported in South Korea, 16 in Iran and 11 in Italy.

The number of WHO confirmed deaths abroad from a pandemic is seen as one of the key inputs to the trigger of the World Bank’s pandemic catastrophe bonds.

We understand that the outbreak in China meets the necessary terms of the catastrophe bond as a covered territory, with confirmed cases and deaths already exceed the numbers required to trigger the pandemic cat bond notes.

But at least one other country needs to see deaths rising above the minimum triggering point of 20, in order for a trigger event to occur. With deaths in South Korea, Iran and Italy all rising, it seems increasingly likely that trigger condition will also be met.

It is then harder for us to know whether the current outbreak meets the other trigger parameters, such as growth rate, but given the way the coronavirus is spreading it does seem likely to be at that level of severity.

So, at this time it seems the threat to the holders of the pandemic catastrophe bond notes is rising, perhaps significantly, in line with the spread of this coronavirus outbreak. Read more.

Update, February 27th 2020:

Iran has now reported that deaths in the country from the coronavirus outbreak there have reached 26, which is higher than the trigger condition concerning international spread of any outbreak, further heightening the risk of default to the pandemic catastrophe bond notes.

We have to stress here that this is the Iranian government’s figure, not the official WHO reported number that would be used to determine whether any default or payout was due. So while the number has surpassed the point required by the trigger, it would still need to be reported as such by the WHO and also be subject to a calculation agent review as well, before it would be determined whether a payout came due.

But at 26 already it seems like we can consider that this second important trigger condition for the pandemic catastrophe bond will now be breached. Read more.

Update, March 2nd 2020:

The highest risk layer of notes is now marked down significantly, with some secondary marks on pricing sheets we’ve seen seeking bids as low as 5 cents on the dollar for the notes, a roughly 95% mark down and a significant drop from the 45 to 55 cents average bid of last week.

The lower risk $225 million of Class A notes have also been marked down, with some pricing sheets marking this tranche of notes for bids as low as 75 to 80 cents, reflecting a 20% to 25% discount. Read more.

Update, March 23rd 2020:

As most trigger conditions have now been breached by the growing global Covid-19 coronavirus crisis, it now looks likely that the pandemic catastrophe bonds will face a loss.

The Class A tranche would face a 16.67% loss of principal, the maximum for any coronavirus outbreak, so amounting to $37.5m.

The Class B tranche would face a 100% loss of principal, so $95m.

For the swaps, the percentages would be the same, so an $8.34m loss for the Class A pandemic risk-linked swaps and a $55m payout for the Class B swaps.

That would amount to a $132.5 million payout for the pandemic catastrophe bonds and a $63.34 million payout for the pandemic risk-linked swaps, in total almost $196 million across both of the instruments that back the PEF’s insurance window.

Update, April 9th 2020:

Sources told us that the first calculation report from AIR Worldwide has not found a payout is due, as the growth rate factor is currently not positive and so the necessary parametric triggers have not yet been breached.

The coronavirus pandemic was deemed an eligible event and so a calculation process was set off, given the virus outbreak has already breached the majority of parametric trigger factors necessary for a payout to be made.

But the “exponential” growth rate, in terms of new coronavirus cases being confirmed, has to be deemed positive and this takes into account a range of IBRD/IDB countries.

It is calculated by comparing the growth rate of the first week after the parametric trigger factors were breached with the next and so on, with rolling calculation agent processes running from then as long as the other factors remain true.

The growth rate considers IBRD/IDA borrower countries, where still the coronavirus is not spreading as rapidly as is seen in countries in Europe, for example. In addition, as the growth rate has declined significantly in China, the source, this is also factored in to the calculation we understand and could be the reason for it not reading as positive.

It seems likely the growth rate in these countries will accelerate, as the virus continues to gain a foothold in countries that are perhaps less well prepared to fight the outbreak.

The calculation agent AIR will again run the growth rate calculation and deliver another event report on April 17th, we are told, which is therefore the next date that these pandemic cat bonds and swaps could be triggered.

Update, April 17th 2020:

The second running of the calculation agent process deemed that the growth rate had turned positive as of March 31st, so triggering the expected almost $196 million payout.

At March 31st, which was the point at which the final trigger condition was met and the growth rate went positive, the IDA countries counted for less than 1% of the global coronavirus case load, which we understand was approximately 4,650 cases.

The payout will be just under $196 million across the pandemic catastrophe bonds and also the pandemic swaps (or OTC derivatives) that were issued at the same time and are backed by reinsurance capital.

It will consist of 16.67% of the $225 million from the Class A pandemic cat bond notes and $50 million from the Class A swaps ($37.5 million and $8.34 million), which could only payout a maximum of 16.67% of their principal for a coronavirus outbreak.

In addition, 100% of the Class B layer, made up of $95 million of Class B pandemic cat bonds and $55 million of Class B swaps, will also now payout, a total loss for that tranche.

So in total the payout coming due will be $195.84 million, which will be disbursed to the World Bank housed Pandemic Emergency Financing Facility (PEF) and will be used to help some of the poorer nations of the world in their response to the worsening global coronavirus outbreak.

As we explained in a previous article, the payout of cash from the pandemic risk-linked swaps can be made more quickly, after a 5 business day wait beyond the official triggering and we assume today’s date as that’s when the report came out.

But for the pandemic cat bonds it could be a little longer, as officially that would normally be at an interest payment date, which are the 15th of the month, so May 15th being the next.

But, we believe the World Bank will do what it can to disburse the money early, as there seems little reason to delay the payout to wait for another interest payment date when that interest payment could still be made anyway (although presumably this would need investor agreement, but they are likely to get that if it is asked for, we believe).

Update, April 27th 2020:

In an update, the World Bank said that the capital from the pandemic cat bond and swaps payout can begin to be disbursed to IDA countries as early as next week.