Coronavirus pressure on pandemic cat bond rises as virus spreads

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 we explained in January, the novel coronavirus (2019-nCoV or Covid-19) outbreak that began in the city of Wuhan in Hubei province China poses a threat to the World Bank’s $320 million IBRD CAR 111-112 pandemic catastrophe bond transaction that provides a source of insurance or reinsurance capital to back the Pandemic Emergency Financing Facility (PEF).

The coronavirus outbreak has the potential to become an eligible event under the terms of the World Bank’s pandemic catastrophe bond notes that provide insurance or reinsurance like capacity to back a pandemic financing facility.

The bonds and reinsurance like component of the financing behind the facility can be triggered if the outbreak reaches pandemic levels and meets certain pre-defined trigger criteria, in terms of officially confirmed cases, growth rate, fatalities and international spread.

As of the beginning of February, the two tranches of notes issued as the World Bank’s pandemic catastrophe bond had not shown any significant response to the coronavirus outbreak.

Secondary market bid indication data from broker-dealer pricing sheets as of February 17th then showed that the price or marks had reacted to the escalating coronavirus situation, with average bid dropping to around 45 cents on the dollar for the riskier Class B tranche of notes.

The secondary marks have not slipped much further at this stage, with a range of pricing from low 40’s to around 70 as of Friday’s pricing sheets, we understand from investor sources.

Most are citing a bid average of 45 to 55 now, depending on which pricing sheet you look at.

We can also reveal that there has been selling interest at these bid ranges, as our sources said that some investors appear to be preparing to sell the notes. We’re told some trades in the pandemic cat bond notes have taken place over the last fortnight, but one source said this is only a handful and not a great deal of the outstanding principal has moved holders at this stage.

The pressure is now rising as the number of deaths in countries abroad is increasing, along with the international spread of the coronavirus, also know as 2019-nCoV or Covid-19.

As of today, February 26th, there are said to be more than 81,000 cases 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.

With this number rising in a handful of countries around the globe now and the spread across borders continuing, it is expected that the pressure on the secondary price of the pandemic cat bond notes may increase and we could see further secondary mark discounts over when pricing sheets are next published by broker trading desks.

The pandemic cat bond notes and their capital providing investors provide the necessary reinsurance capital to back the so-called Insurance Window component of the Pandemic Emergency Financing Facility (PEF).

The World Bank’s $320 million IBRD CAR 111-112 pandemic catastrophe bond provides a source of insurance or reinsurance capital to back the Pandemic Emergency Financing Facility (PEF).

The necessary finance for the PEF consists of a so-called Insurance Window component, made up of $105 million of pandemic risk linked swaps (ceded to reinsurance and ILS funds we believe) and this $320 million of pandemic catastrophe bonds.

Together these instruments provide the necessary reinsurance capital to back the facility alongside its so-called Cash Window which consists largely of donor funds.

For an outbreak of a pandemic to qualify and become an eligible event under the terms of the World Bank’s pandemic catastrophe bond notes, it needs to meet a number of severity related criteria, in terms of the duration of any outbreak, the number of confirmed deaths reported from it, its spread geographically and also a growth rate factor in terms of how quickly the outbreak is actually spreading.

The World Bank’s pandemic catastrophe bond has been structured into two tranches, issued to investors as $225 million of Class A notes and $95 million of Class B notes, with both exposed to a coronavirus outbreak, but under different terms.

The Class A notes require a coronavirus outbreak to result in more than 2,500 deaths (already met), with at least 250 cases being confirmed on a rolling basis, as well as more than 20 deaths being seen in at least one country overseas, for a 16.67% loss of principal to this tranche to occur.

Update, Feb 27th: Coronavirus outbreak meets another pandemic cat bond trigger condition

The Class B notes are the more likely to face triggering under a qualifying event outbreak, as only more than 250 confirmed deaths are required, alongside the other factors, for a payout to be due.

The trigger criteria for the Class B notes is more complicated though, as different payout rates are applicable depending on how many countries outside of the originating country see more than 20 confirmed deaths each.

For example, more than 250 confirmed deaths and a regional spread meaning between 1 and 8 other countries experiencing 20 deaths each, could cause a 37.5% reduction in principal. A higher percentage payout of 43.75% of principal would be due if the outbreak was seen to cause deaths in more than 8 other countries.

There are higher trigger points for the Class B notes for more than 750 and 2,500 confirmed deaths, again with percentage payouts dependent on whether the event is classed as regional (less than 8 international countries with over 20 deaths each), or global (more than 8).

All of which makes it very challenging to price in the risk of the current outbreak particularly accurately, but based on the latest data and the spread of the virus, with the number of deaths rising in a few countries overseas, the pressure is without doubt increasing at this time.

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.

We’ll update you as and when necessary should the threat to the IBRD CAR 111-112 pandemic catastrophe bond notes from the increasingly global coronavirus outbreak rise further.

Also read: Coronavirus outbreak meets another pandemic cat bond trigger condition.