The World Bank issued pandemic catastrophe bonds, as well as the pandemic risk-linked swaps that were issued at the same time, have not yet been triggered by the Covid-19 coronavirus pandemic as the growth rate hasn’t reached the necessary level to breach the parametric trigger.
No loss payment is due at this time, as the first calculation agent report found that the growth rate has not been “exponential” in the first period that the numbers have been run for.
The calculation agent process will be run again on a rolling basis from now, so the chance of a loss payment and loss of investor principal coming due remains very high and the investor principal in the reinsurance trust backing the pandemic cat bonds still looks likely to be called upon to support some of the most in-need countries with their response to the coronavirus.
As we explained in our last article on the World Bank’s pandemic bonds and swaps, the global impact of the Covid-19 coronavirus pandemic has more than surpassed the levels needed to trigger the instruments.
The trigger conditions for number of confirmed cases and deaths have 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 is the growth rate, which is calculated by comparing the rate of growth in IDA/IBRD countries over a rolling period.
In order for a payout of the pandemic cat bonds and swaps to be triggered, the total number of cases in IDA/IBRD countries has to be confirmed as increasing at an exponential rate by AIR Worldwide, the third-party calculation agent.
AIR ran its first calculation after March 23rd, with the report delivered last week on Thursday April 9th.
But the report deemed that the growth rate was not “exponential” and so no payout due at this time.
The reason the growth rate didn’t reach the required positive level is that cases in China have been on a steady decline, after the initial explosion of the disease there, during recent weeks and this decline has outweighed the growth in IDA/IBRD countries which has accelerated more recently.
DBRS Morningstar explained, “We estimate that the influence of the evolution of coronavirus cases in China will mostly drop from the calculation of the growth rate in late May, when the rolling period will run from February 24 to May 18 and will be mostly driven by the growth of cases in other countries. For instance, the slight growth in the number of cases in China during March contrasts with the rapid increases we are now witnessing in Iran, Brazil, Turkey, Russia, and Ecuador— all of which are IDA/IBRD countries.”
Now, 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 seen declining.
AIR’s next calculation agent report will be due on April 17th and it will be interesting to see whether increased rates of cases announced in IDA/IBRD countries versus a slowing of the slowdown in case growth in China could be sufficient for the exponential growth to return and trigger the pandemic bonds and swaps.
If the growth rate is reported as exponential on April 17th, the payout is likely to amount to $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.
The payout would consist 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 100% of the $95 million Class B pandemic cat bonds and $55 million Class B swaps, totalling $195.84 million.
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 of the world in their response to the worsening global coronavirus outbreak.
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.
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).
The pandemic’s impacts on the IDA/IBRD countries is expected to be significant and the capital this transaction can disburse, if triggered, will provide a welcome source of inflows as the arrangement was always envisaged to do.
Some experts state that IDA/IBRD countries are running some four to six weeks behind the countries that have so far experienced the worst of the pandemic, suggesting there is still time for a payout to provide a timely injection of capital to these locations just as the impacts of the virus worsens.
This also supports the theory that a payout is likely to come due before the pandemic bonds maturity this summer.
We’ll update you around April 17th when the next calculation report is due.