Secondary market pricing for the World Bank’s pandemic catastrophe bond notes are set to decline, significantly for one tranche, after the coronavirus outbreaks spread resulted in a second triggering condition being met, Plenum Investments believes.
While the pandemic cat bond issued by the World Bank has not yet been triggered and so no payout is due at this time, the news of the rising number of cases and deaths in countries overseas from the epicentre in China is set to pressure pricing, these investors believe.
The novel coronavirus (2019-nCoV or Covid-19) outbreak that began in the city of Wuhan in Hubei province China poses a growing threat to the World Bank’s $320 million IBRD CAR 111-112 pandemic cat bond transaction.
The pandemic cat bond provides a source of insurance, or reinsurance like, capital to back the Pandemic Emergency Financing Facility (PEF).
With the coronavirus outbreak having the potential to become an eligible event, under the terms of the World Bank’s pandemic cat bond notes, the increasing severity of the situation in recent days is set to increase pricing pressure it seems.
As a result, the pandemic cat bond notes that provide some of the insurance or reinsurance like capacity to back the pandemic financing facility appear more exposed to potential losses at this point in time.
Swiss headquartered catastrophe bond investment fund specialist managers at Plenum Investments said that, for both of the tranches of the pandemic cat bond, “the probability of a nominal loss of value has increased.”
Commenting on the number of deaths from the coronavirus outbreak reaching 26 in Iran yesterday and what this could mean for secondary market pricing of the pandemic cat bond notes, Plenum Investments explained, “This is the first time that a further criterion has been met and, in view of the high and still increasing number of cases and fatalities the probability of a nominal loss of value has increased.
“Initial reactions can be seen in the market price indications for these two bonds, whose valuation ranges between 90 and 99 cents per dollar for the more conservative tranche and between 45 and 69 cents per dollar for the riskier tranche. We expect the riskier tranche in particular to suffer significant price losses, as the potential loss here is 100% of the outstanding nominal value. The less risky tranche can suffer a maximum loss of 16.67% of the nominal value, which limits the price loss potential.”
As we explained in our article yesterday, the triggering of the pandemic cat bond requires a number of conditions to be met before payouts would be activated, among which are duration of the outbreak of 12 weeks or greater (not met), number of deaths in the source country (met), number of deaths in at least one country overseas (met) and a growth rate factor at the 12 week term end (unknown).
Plenum Investments expects that the riskier tranche of notes, which hadn’t seen much in the way of secondary market price movement so far, is likely to be marked-down in broker pricing sheets today, perhaps significantly so.
While the less risky and already marked-down tranche of pandemic cat bond notes may only see a little additional pricing pressure.
Plenum itself disclosed that its cat bond fund only holds a 0.75% position in the less risky tranche of the World Bank’s pandemic cat bond, meaning that “the maximum performance impact from this event is limited to 6 basis points.”