The payout from the World Bank issued pandemic catastrophe bonds, as well as the pandemic risk-linked swaps that were issued at the same time, may reach just under $196 million in total, if the ongoing Covid-19 coronavirus outbreak triggers the financial instruments.
The impact from the Covid-19 coronavirus pandemic has more than surpassed the levels needed to trigger the instruments, but a number of factors need to be calculated and clarified before a payout would be deemed due.
As the world grapples to control the coronavirus outbreak, with tragic scenes occurring in many countries around the world, this arrangement looks set to come good and deliver on its promises as a source of additional capacity to help poorer nations in their response at a time when a pandemic is worsening.
In total, the payout looks like to be just below $196 million, with some $132.5 million coming from the IBRD CAR 111-112 pandemic catastrophe bonds and another almost $46 million being funded by the triggering of pandemic risk-linked swaps that match the terms and conditions of the pandemic bonds.
That funding, if triggered, will be disbursed to the World Bank housed Pandemic Emergency Financing Facility (PEF) and will be used to help some of the poorer nations most at need in their response to the worsening global coronavirus outbreak.
Payments from the PEF can be disbursed directly to governments, as well as pre-approved frontline response organisations such as WHO & UNICEF.
The Pandemic Emergency Financing Facility (PEF) was established to provide a new source of funding for major pandemic outbreaks and part of the funding was arranged in the form of a so-called insurance window.
This insurance, or reinsurance, financing for the PEF consists of $105 million of pandemic risk linked swaps (ceded to reinsurance and ILS funds we believe) and the $320 million of pandemic catastrophe bonds (sold to cat bond investors).
There are two tranches of each, following the same payout and trigger terms and conditions, which right now look set to be breached.
As we’ve explained in our coverage of the pandemic catastrophe bond notes, a number of the trigger conditions have already been met and the number of Covid-19 coronavirus cases and deaths, as well as its global spread, more than meet the conditions required to cause a payout.
As we explained in more detail here, the triggering of the pandemic cat bond notes requires the duration of the outbreak to reach 12 weeks or greater and today, March 23rd, is the last day in that window.
The trigger requires a specific number of deaths in the source country (which has been met for both tranches), number of deaths rising above 20 in at least one country overseas (met, now in numerous countries), as well as a growth rate factor in terms of new cases being confirmed at the end of the 12 week duration term (unknown at this stage, but calculation of this to begin tomorrow we assume).
Should more than 8 countries face over 20 deaths each (not including the source country of China) then the payout rates rise to their maximum, with the potential for a full loss of principal for the Class B tranche of pandemic bonds and swaps, as long as there are over 2,500 confirmed deaths in total.
This has now been eclipsed by the current pandemic, with as many as 18 countries having surpassed the 20 deaths in-country and the total number of deaths now over 13,500 (with some 313,000 cases globally).
So the trigger conditions for cases and deaths are easily met and we’re passing the 12 week point of the outbreak today. So the last important factor of note is the growth rate, which will be calculated by comparing the growth rate of this week with the next and so on.
For the Class B pandemic bonds and swaps, which are $95 million of pandemic cat bonds and $55 million of pandemic swaps, these now look set for a 100% payout once the growth rate is calculated and if it is positive.
The $225 million of Class A pandemic cat bond notes and $50 million of swaps can only payout 16.67% of their principal for any coronavirus outbreak, paying out more for other types of pandemics according to their terms.
For the Class A coverage, the terms require a coronavirus outbreak to result in over 2,500 deaths (met), as well as more than 20 deaths being seen in at least one country overseas (met), plus a growth rate factor being positive.
It’s the growth rate calculation that is the unknown at this time and as of tomorrow, March 24th, the calculation agent AIR Worldwide will begin the process of comparing rate of growth across a two week period versus the previous two.
However, this only considers the growth rate in IBRD/IDA borrower countries, we understand, where right now the coronavirus is not spreading as rapidly as is seen in countries in Europe, for example.
After the two weeks AIR will derive whether the growth rate is positive and if so that would trigger the pandemic cat bonds and swaps, which right now would result in the nearly $196 million payout.
But if the growth rate isn’t positive, then the calculation of the growth rate rolls forwards one week, to compare another two week period with the last, and so on, until it either is sufficient to trigger or is declining.
So a payout isn’t guaranteed, although looks incredibly likely at this time.
With the pandemic risk-linked swaps, a faster payout could be given, with the reinsurance providers backing these supposed to pay out in 5 business days (important no note business days as we have Easter approaching), where as the pandemic cat bonds could wait till the next coupon interest date.
However, we understand that the World Bank’s IBRD could elect to pay the amount out more quickly than that, if it chose to, just holding back sufficient for the next interest payment.
It seems that the first date an official triggering notice could be sent is April 9th, if the growth rate is immediately positive enough in the first calculation agent run. If it’s not, then it could be 7 days later, and so on.
When money could be disbursed via the PEF to IBRD or IDA borrowing countries in need would depend on the ability of the World Bank’s IBRD to expedite any payout.
As said, the payout of cash from the risk-linked swaps can occur much more quickly, after a 5 business day wait beyond the triggering. But the cat bonds, unless expedited, could be at an interest payment date, the first of which is likely to be May 15th it seems.
It seems likely the World Bank will do what it can to disburse the money just as quickly as it can though, as there seems little reason to delay it to wait for another interest payment date when that payment could still be made anyway (although this likely needs investor agreement).
Looking at the way the coronavirus has spread into Europe and the rate of cases occurring and being confirmed there, it seems that similar rates of growth are likely in countries which are only just experiencing the beginning of their own outbreaks.
As this pandemic unfolds and spreads further in the many countries around the globe where it is now gaining a foothold, it appears inevitable that the growth rate in IBRD / IDA countries will reach the levels required to finally cause this payout to occur.
The nearly $196 million payout would be made up of 16.67% of the $225 million of Class A pandemic cat bond notes and $50 million of Class A swaps ($37.5 million and $8.34 million), as well as the 100% of the $95 million Class B pandemic cat bonds and $55 million Class B swaps (so $195.84 million to be precise).
At a time when demand for pandemic insurance protection is at an all-time high, a payout from these instruments into poorer nations suffering from growing outbreaks of the coronavirus will be extremely welcome and demonstrate the importance of diverse financing sources.
The Class A tranche of pandemic cat bond notes are now marked down 17% in the secondary market, reflecting the expectation of the 16.67% loss of principal, while the Class B notes are marked down in expectation of a total loss of principal.
That suggests the catastrophe bond market and other holders of the pandemic bonds expect this loss will occur, have priced it in and is ready for the loss of principal when it is announced.
Similarly, we expect the re/insurers and any ILS funds backing the pandemic swaps will also have written down their valuation of these contracts as well, given this $196 million payout looks an almost certainty now.