The World Bank issued pandemic catastrophe bonds and pandemic risk-linked swaps have now been triggered and will pay out $195.84m, we’ve learned today, after the final trigger parameter of the growth-rate of coronavirus cases turned positive.
Sources told us that the all-important growth rate factor turned positive as of March 31st, which was the final piece of the trigger that need to fall into place for a pay out to come due.
Now the $195.84 million of capital from the pandemic bonds as well as the pandemic risk-linked swaps that were issued at the same time, will be made available in the coming weeks to fund the World Bank’s Pandemic Emergency Financing Facility (PEF) to support IDA countries in their response to the Covid-19 coronavirus pandemic.
As we explained in previous articles on the World Bank’s pandemic bonds and swaps, the global impact of the Covid-19 coronavirus pandemic more than surpassed many of the data points needed to trigger the instruments.
The trigger conditions for the number of confirmed coronavirus cases and deaths had been far exceeded, while the 12 week point term of the outbreak, that is also a trigger condition, was met on March 23rd.
The final important trigger input was the growth rate, which is calculated by comparing the rate of growth in IDA/IBRD countries over a rolling period and in order for a payout of the pandemic cat bonds and swaps to be triggered, the total number of cases in IDA/IBRD countries had to be confirmed as increasing at an exponential rate by AIR Worldwide, the third-party calculation agent.
The first running of the calculation agent process found that no loss payment was due as the growth rate has not been “exponential” in the first period that the numbers have been run for, as we explained before.
The calculation agent process was then run again on a rolling basis and the second report came out just today and we’re told shows that the growth rate turned positive as of March 31st, making a payout due.
As a result there will be a loss of catastrophe bond investor principal with the funds backing the pandemic cat bonds set to be called upon to support some of the most in-need countries with their response to the coronavirus.
Also set to payout are the pandemic risk-linked swaps that were issued at the same time and we understand are backed by reinsurance capital from both the traditional and alternative marketplaces.
The payout will be just under $196 million across the pandemic catastrophe bonds and also the pandemic swaps (or OTC derivatives) that were issued at the same time and are backed by reinsurance capital.
It will consist of 16.67% of the $225 million from the Class A pandemic cat bond notes and $50 million from the Class A swaps ($37.5 million and $8.34 million), which could only payout a maximum of 16.67% of their principal for a coronavirus outbreak.
In addition, 100% of the Class B layer, made up of $95 million of Class B pandemic cat bonds and $55 million of Class B swaps, will also now payout, a total loss for that tranche.
So in total the payout coming due will be $195.84 million, which will be disbursed to the World Bank housed Pandemic Emergency Financing Facility (PEF) and will be used to help some of the poorer nations of the world in their response to the worsening global coronavirus outbreak.
For the catastrophe bond investors and ILS fund managers that held these pandemic cat bond notes the payout will not come as a surprise and the notes had been marked down for a loss of this amount for some weeks now. So while that capital is now set to be lost, the value of their funds won’t be affected any further due to this news (as the triggering was already factored in).
Payments from the PEF can be disbursed directly to governments, as well as to 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, backed by catastrophe bonds and reinsurance instruments.
There has been a lot of negativity surrounding this pandemic catastrophe bond deal, in particular the time it has taken to trigger.
As we’ve explained before, no trigger mechanism is perfect, especially not when it comes to complex perils such as global pandemic outbreaks. The work to design this trigger had a focus on providing the capital to the PEF at the point where IDA supported countries really needed it.
At March 31st, which was the point at which the final trigger condition was met and the growth rate went positive, the IDA countries counted for less than 1% of the global coronavirus case load, which we understand was approximately 4,650 cases.
Perhaps the triggering could have been quicker. It’s almost certain a second and updated iteration of these pandemic catastrophe bonds would have been designed with the significant learnings now available to that process, so perhaps making faster payouts possible.
But the structure had to balance the needs of the IDA nations, in providing the capital right as the impacts of a pandemic was worsening for them specifically, but also meet the needs of investors in terms of robustness and transparency, plus also carry a level of probability of attaching that would make them still economical to issue.
The discussion over whether the pandemic cat bonds did their job or not will no doubt rage in the mainstream press.
But the pay out will now be made and the capital markets and reinsurance players will now fund the PEF with almost $196 million of capital, which hopefully can be disbursed as quickly as possible to help the IDA countries respond to the coronavirus.
As we explained in a previous article, the payout of cash from the pandemic risk-linked swaps can be made more quickly, after a 5 business day wait beyond the official triggering and we assume today’s date as that’s when the report came out.
But for the pandemic cat bonds it could be a little longer, as officially that would normally be at an interest payment date, which are the 15th of the month, so May 15th being the next.
But, we believe the World Bank will do what it can to disburse the money early, as there seems little reason to delay the payout to wait for another interest payment date when that interest payment could still be made anyway (although presumably this would need investor agreement, but they are likely to get that if it is asked for, we believe).