The first catastrophe bonds that will support the World Bank designed Pandemic Emergency Financing Facility (PEF) have been launched to the investment community, with two series of capital at risk notes that are being issued by the International Bank for Reconstruction and Development, a $100 million transaction we’re naming IBRD CAR 111-112.
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.
The World Bank is already discussing the facilities expansion in future years, so cat bonds and ILS investors could find themselves playing an increasingly important role in the capacity provision to back the PEF in years to come.
This first issuance will be a test for the ILS market, as pandemic coverage has typically been mortality based in cat bonds in the past. This is the first where cases as well as deaths can influence the payout factors.
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