No coronavirus price response from World Bank’s pandemic cat bond yet

The developing and still worsening outbreak of a novel coronavirus in China has not yet caused any price response from the World Bank’s pandemic catastrophe bond transaction.

As we explained last week, the novel coronavirus (2019-nCoV) outbreak that began in the city of Wuhan in Hubei province China could pose a potential threat to the World Bank’s $320 million IBRD CAR 111-112 catastrophe bond 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 if the outbreak reaches pandemic levels and meets certain pre-defined criteria in terms of officially confirmed cases and fatalities.

As of the latest World Health Organisation (WHO) situation report (dated Feb 2nd), there are 14,557 cases of the coronavirus and 305 deaths with the majority in China and just one of the deaths occurring overseas.

This morning (Feb 3rd) the figures reported by Chinese media suggest cases are now at more than 17,300, while deaths have reached around 362.

These figures are expected to rise and there remains concerns that the number of cases may be understated in China still, but the fatality rate is far lower than SARS and other notable coronavirus outbreaks, although higher than normal seasonal flu.

In our previous article we explained how the pandemic cat bond notes and their investors provide the necessary reinsurance capital to back the so-called Insurance Window component of the Pandemic Emergency Financing Facility (PEF).

In order for the noteholders to face any loss of principal the coronavirus outbreak would need to reach a certain level of severity, in terms of the duration of the outbreak, the number of confirmed cases and deaths reported, the virus’ spread geographically with deaths experienced abroad and also a growth rate factor in terms of how quickly the outbreak is spreading. More details on the trigger in our previous article here.

As of now there hasn’t been any price response in the secondary cat bond market from the World Bank’s two tranches of pandemic risk catastrophe bond notes.

Zurich headquartered specialist catastrophe bond investment manager Plenum Investments explained, “Both bonds have so far shown no price response to the 2019-nCoV outbreak, and so the event will not have a negative impact on the fund’s performance.”

Plenum said that it holds a position in the less risky tranche of notes, explaining that the chance of them being triggered currently appears remote given at least 2500 fatalities would be required for that layer of protection to be triggered and even then a coronavirus can only trigger a 16.67% payout of the nominal value held.

Investors and fund managers holding the pandemic cat bonds therefore remain alert to the developing situation, ready to respond and mark down positions should the risk of attachment rise for the pandemic bonds.

Plenum Investments also said that the riskier tranche of pandemic cat bond notes, which would require at least 250 coronavirus fatalities to occur before any payout could come due, is already marked down to around 70 cents on the dollar due to the Ebola outbreak in the Democratic Republic of Congo.

Had that riskier tranche been priced closer to 100 and not faced any secondary pressure from the Ebola outbreak, it’s possible this coronavirus outbreak may have resulted in some pressure on the price, resulting in a mark down. But as it was marked down already the current secondary mark may incorporate some level of market nerves related to the coronavirus outbreak.

There remain many factors at play in the trigger of the pandemic cat bond, which is designed to provide reinsurance coverage for regional and global pandemic events that could threaten the developing countries protected under the World Bank’s Pandemic Emergency Financing Facility (PEF).