Note: This story was first published on March 4 but will be updated regularly as new data becomes available.
A World Health Organization (WHO) situation report on March 3 catalogued nearly 91,000 cases of coronavirus Covid-19 across 76 countries, causing more than 3,100 deaths.
In 2017 the World Bank issued a pandemic bond designed to help fund the response to any widespread outbreak of a number of diseases, including coronavirus. The $320 million bond was part of a bigger $425 million risk transfer that included a concurrent $105 million swap with six reinsurance counterparties.
Should it already be paying out?
As of March 4, the answer was no.
The earliest that it can be triggered is March 24, but that is subject to many factors, some of which are hard to assess. If it does pay out, it will do so only to a very targeted group of countries – the poorest in the world, which are also those with the weakest healthcare systems and likely to be the slowest to begin to report accurate assessments of an outbreak.
Structuring the pandemic bond, as Euromoney reported in depth at the time, was immensely complicated, not least because it needed to strike a balance between being useful and being investible.
The bond will mature on July 15, although it can be extended by one year. The World Bank is preparing a second iteration of the scheme, dubbed Pandemic Emergency Facility (PEF) 2.0, which the Bank said last year was to be marketed in May 2020.
Critically, the triggers for the existing bond to pay out depend solely on cases of disease reported by developing countries – those that fall within the World Bank’s lending categories of IBRD (International Bank for Reconstruction and Development) or IDA (International Development Association).
Among the parameters governing whether or not the bond is triggered are: the number of IBRD or IDA countries affected; the number of cases in each of those countries; the number of deaths; the percentage of confirmed cases to total cases, including suspected; and the growth rate of cases.
All of these will be assessed based on specific reporting periods. The conditions to trigger the bond need to be in place at least 12 weeks after the designated start of the event for payouts to happen. After that, they must be in place on a rolling 12-week basis.
In the event that the bond is triggered, it will release funding only to IDA countries. A country seeking assistance is required to request the funds.
Given that the assistance provided by the bond is only triggered by cases and deaths within IBRD and IDA countries, the big hurdle is these countries’ own ability to reliably record and report cases and deaths. At the moment, only five IDA countries have reported cases of coronavirus, and none has reported the required number of deaths, which is 20 in each country.
According to a statement from the Africa Centres for Disease Control and Prevention on March 3, some 30 African countries had reported suspected cases, although only five have confirmed a handful of cases, according to the WHO. Testing kits are gradually being made available throughout the continent.
Since the pandemic bond is intended to help developing countries deal with serious outbreaks of disease, there has been criticism that it was not triggered by outbreaks of Ebola virus since its creation, including an outbreak in the Democratic Republic of the Congo last year. The complexity of the trigger mechanisms and the resulting difficulty in modelling the payout scenarios have also come under fire.
However, while the bonds were not triggered by last year’s Ebola outbreak, the companion cash window scheme that forms the other part of the PEF was triggered and paid out $50 million to the DRC. The World Bank committed a further $350 million to that outbreak, via the IDA.
But all that has now been dwarfed by the World Bank’s announcement on March 3 of an immediate $12 billion emergency aid effort to assist developing countries in tackling the coronavirus Covid-19 outbreak.
Bond triggers
So far in the current coronavirus outbreak, the pandemic bond has not been triggered. What needs to happen for that to change?
Below are the key triggers for the ‘insurance window’ (the funding provided by the pandemic bond) to pay out:
1) Time period
A period of 12 weeks has to pass from the designated start of the outbreak, as marked by an Eligibility Event Notice. The World Bank has told Euromoney that an Eligible Event Notice was issued by the IBRD on January 31.
Assuming that this report determined that the event had started on December 31, the first date when cases were reported to the WHO by China, the earliest date for triggering the bonds would be March 24.
2) Cases
At that point, the outbreak must be affecting more than one IDA or IBRD country. If up to seven countries are affected, it is designated as a regional outbreak; if the number is eight or more, then it is designated as global. For a country to count towards this total, it must have at least 20 confirmed deaths.
In addition, the rolling total number of cases in IBRD/IDA countries – in other words, the number within a rolling 12-week period – must be at least 250, and it must also still be growing at a rate determined by a complex formula.
The rolling confirmed number of cases must be at least 20% of the rolling total of cases, which includes those merely suspected to be coronavirus.
As of the March 3 data, cases had been reported in 28 IBRD countries and six IDA countries, but only in two of those (China and Iran) had there been more than the required 20 deaths as a result.
Purely on that basis, the outbreak would currently be designated as a regional pandemic, affecting fewer than eight IBRD/IDA countries with the required severity and with cases still growing.
As neither China nor Iran are IDA countries, neither can apply for PEF relief funds. But if individual IDA countries were to meet the other criteria in the future, they would be eligible for funds so long as overall IBRD/IDA cases were still growing.
3) Deaths
In addition to the country-level requirement for 20 deaths, there must be a total of at least 250 confirmed deaths in IBRD/IDA countries. With 2,943 reported as of March 3 in China alone, the 250-death requirement has already been met for the current 12-week period.
The theoretical payout to IDA countries of the $195.8 million that is available in the case of coronavirus is staggered based on the number of total deaths in IBRD/IDA countries. At 250, the payout is 29% ($56 million) for regional outbreaks and 34% ($66 million) for global; at 750 this rises to 57% ($113 million) for regional and 67% ($131 million) for global.
The maximum requirement of 2,500 deaths has already been met, meaning that the full regional/global payout of $195.8 million is available, assuming all other criteria are met. There are formulas for determining the exact level of funding that each country can receive, based on factors including population size.
4) Pandemic bondholder losses
The World Bank’s pandemic bond was structured with two classes. The $95 million class-B tranche pays out first, and can be reduced to zero by a coronavirus payout. There is a greater hurdle for payout from the $225 million class-A tranche, and the loss here is capped at 16.67%, or $37.5 million.
At 250 IBRD/IDA deaths within the time frame, and assuming the rolling case and growth rate requirements have been met, the class-B tranche suffers principal reduction of 37.5% in the case of a regional outbreak and 43.75% in the event of a global outbreak. At 750 deaths, this rises to a 75% loss for regional and 87.5% for global. At 2,500 deaths the entire tranche is lost.
The rolling deaths hurdle for the class-A tranche is 2,500, which has already been met, meaning that as things stand, the class-B tranche would be completely wiped out and the class-A tranche would suffer its maximum principal reduction of 16.67%.
In late February, the class-B bonds were marked at about 45, while the class-A were at between 90 and par.
The difference between the maximum $195.8 million assistance available to countries in the case of coronavirus and the maximum bondholder losses of $132.5 million is accounted for by the concurrent reinsurance swap.
Cash window depleted
The World Bank’s pandemic bond was the largest and most innovative part of a broader response programme set up by the multinational organization, called the Pandemic Emergency Facility (PEF).
It was implemented in response to what was widely recognised within the World Bank and the World Health Organization to have been a slow and ineffective reaction to a bad outbreak of Ebola in 2014.
The PEF has two parts: a cash window and an insurance window. The cash window, which is intended to be sized at $50 million to $100 million, is funded by donor countries and has more lenient triggers than the insurance window.
The insurance window is $425 million and was funded by capital markets issuance – the $320 million bond and the $105 million swap. Bond coupons are paid for by the PEF (passed through to donor governments) and by the World Bank.
The cash window should, in theory, pay out before the insurance window. For coronavirus, it can be triggered by 30 cases in an IDA country where human-to-human transmission can be confirmed, and 100 cases if not. The cases must have occurred within any four-week period within the six weeks prior to a request for assistance being made.
However, while the cash window was envisaged to be replenished each year, the World Bank has told Euromoney that as of March 2 it had not yet been replenished in 2020, meaning that a mere $2.7 million is currently available.
Since being put in place, the PEF’s cash window has been used three times – all to help fight Ebola. In May 2018 it contributed $11.4 million to the Ebola response in the Democratic Republic of Congo, which also received two further tranches of $20 million and $30 million for the outbreak in 2019.
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