Media reports state that the World Bank has shelved plans for any future issuance of pandemic catastrophe bonds and for a version two of its Pandemic Emergency Financing Facility (PEF).
This is despite the fact the first issuance of PEF supporting pandemic bonds paid out, as the terms dictated they would, for the Covid-19 coronavirus pandemic.
The Financial Times reported that a spokesperson at the World Bank told the paper that there would not be a PEF 2.0.
An improved PEF 2.0 was expected to be marketed around this time, prior to the maturing of the first transaction.
Work had been underway to improve on the design of the structure and its triggers, we understand, but are told activity was halted during the Covid-19 pandemic as the original transaction came under fire in the mainstream media.
Accusations ranged from, the PEF and the pandemic cat bonds that backed it being too slow to trigger, to the investors being paid too much in terms of coupons and premiums.
This is despite the fact the PEF and the bonds paid out according to their design and the terms of the deal, as well as the fact the actual cost of the insurance protection provided by the PEF and the cat bonds was commensurate with market levels at the time.
The major objections to the PEF and the use of catastrophe bonds, or any kind of private market insurance or reinsurance capacity to support it, seems to be in paying for protection at all, when critics claim the World Bank can easily just disburse capital and loans to support affected countries.
Which is all well and good until a pandemic occurs that sees capital markets dry up and the World Bank itself be unable to raise sufficient funds or borrow at will, at which point a secure and contingent source of just-in-time capital funding would have been particularly welcome.
Morton Lane, of Lane Financial LLC, explained this well in his latest report, writing, “Too many critics assume that post-event funding will be available at cheap rates. So, why pay premiums – just use interest rates post-event. It will undoubtedly be cheaper if all other things stay the same. But here on our doorstep is the perfect example of things not being the same. The bond markets of the world are almost shut down because of coronavirus. And, absent access to the bond market does anybody think that the shareholders of the Bank are in any state to fund new equity to shore up a World Bank with vast losses? It is not clear how long it will be before they can even access the market again.
“A case in point is the World Health Organization – its funding has been suddenly yanked away at a mission-critical time. The same can happen to any nation supported agency, e.g., the Bank.”
The PEF and its pandemic catastrophe bonds were designed to be a last-resort source of capacity to assist IDA borrowing countries at a time when the world was facing an event of such magnitude that capital may have dried up from more typical sources.
Perhaps the transaction was explained poorly to the media around its launch, expectations were clearly higher. But also, the terms were not fully understood (which became evident when some of the most vocal critics repeatedly mischaracterised the transactions in the press and were inaccurate in their descriptions of the bond trigger).
It’s a shame to see the World Bank pull away from a second attempt to make a more robust version of the PEF, taking into account learnings and perhaps even finding a way to bring its critics onboard, as undoubtedly they have something to add to these discussions.
The use of securitisation as a way to finance post-event disaster or catastrophic risk, with support from capital market investors, has significant value even for entities with the liquidity of the World Bank.
That’s proven out time and again with its work in natural catastrophe bonds, as well as other forms of disaster insurance and reinsurance.
We recommend reading Morton Lane’s new paper, as it provides a very good critique of the bonds and concludes that the World Bank should persist with its risk transfer activities.