Global health experts say last month’s $133 million writedown on the World Bank’s pandemic bonds is "too little too late” squandering public health resources on paying investors.
The World Bank designed pandemic bonds in the aftermath of the 2013-14 Western African Ebola epidemic, which killed 11,310 people, as a way of financing responses to pandemics in developing countries by transferring risk onto markets.
'The bonds were the wrong instrument to begin with,' said Olga Jonas, a senior fellow at Harvard Global Health Institute who worked at the World Bank for three decades.
In July 2017, the World Bank issued $320 million USD in bonds to investors. The bonds include risky and less risky tranches that pay 11.1% and 6.5% interest above the London Inter-Bank Offered Rate (LIBOR) respectively.
High thresholds, such as the number of deaths and affected-countries must be met for the bonds to pay out to the World Bank’s Pandemic Emergency Financing Facility (PEF), who use them to support developing nations fighting pandemics.
The PEF was funded by Australia, Japan and Germany who sit on the PEF steering body responsible for dispersing the funds to low-income countries, alongside the World Health Organisation (WHO), World Bank, Haiti and Liberia.
'The fact that they were triggered late and will now slowly pay out a small amount because of the worst pandemic in more than 100 years does not change this ...The core principle of disease outbreak control is early action.'
On April 17th, AIR Worldwide – the risk modelling agency hired by the World Bank to design and arbitrate the criteria for payout – ruled that all $95 million from the riskier tranche A of the bonds and $225 million (16%) of the less risky tranche B would be transferred to the PEF. But they will not be released until May 15th. The decision comes 32 days after WHO first declared a pandemic.
Jonas says the conditions that need to be met to trigger a payout of the bonds is 'are by design and not predictable by design'.
AIR Worldwide previously ruled on April 11 that the “exponential growth” condition had not been met to trigger a payout. By this time, the global death toll had reached 88,145 and total cases 1,512,439 and investors had received $115 million in coupons.
Dr Felix Stein, a senior research fellow at the University of Edinburgh who studies the financialization of global health security, said, 'the PEF payout criteria were structured so as not to pay out for pandemics'.
An analysis published in the British Medical Journal found that, over the past 15 years, only two outbreaks would have met the bond’s thresholds for payout: the 2006 Rift Valley fever and Ebola epidemic.
In contrast, the WHO’s Contingency Fund for Emergencies, funded by donor states, has rapidly provided funds to developing nations 66 times since its 2005 creation.
Dr Stein suggested that:
'The Bank should be much more open about who designed the PEF (Munich Re and Swiss Re) and who invests in it. What relationships exist between groups designing the PEF & investing in it? Munich Re & Swiss Re are themselves major investors.'
The World Bank and AIR Worldwide refused requests to share information on who purchased the bonds.
Information is scarce from the few dedicated catastrophe investors, pension funds and asset managers who admitted to taking part in the scheme.
In a letter to the World Bank’s Executive Directors on April 2, Jonas asked:
Why did the World Bank have to issue the pandemic bonds, which have an extremely high financing cost, especially in this time of low-interest rates? IDA [the International Development Association] has $29 billion in Liquid Assets and a financing capacity of $27 billion/year, so it can promptly finance outbreak responses.
The bonds were oversubscribed 200% in 2017, but it is unclear how positively investors will receive them when they are next issued this July.
Catastrophes bonds are marketed to investors as a way of diversifying credit risk because they are uncorrelated to general markets. However, unlike earthquakes and cyclones, COVID-19 is on track to coincide with a global recession.
'This pandemic is a game-changer because of the radical economic effects it has. So the risk diversification selling point is very weak in my eyes,' said Dr Stein.
Adil Imani, a manager from AIR Worldwide's Insurance-Linked Securities (ILS) group is more optimistic:
“While any prediction is speculative by definition, we believe this could very well be a catalyst for parties throughout the risk transfer chain to explore ILS as an avenue to better protect themselves against these types of events."
'The investors understand the exceptional nature of this situation,' said Jonas.
'They would buy these bonds again because they were an attractive deal for them. On the other hand, the bonds were a very bad deal for IDA countries and will remain a losing proposition in the future.'
Jeremy Nadel is a student at the University of Melbourne and an aspiring journalist.
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