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Coronavirus Triggers $133 Million Writedown on Pandemic Bonds

Coronavirus Triggers $133 Million Writedown on Pandemic Bonds

(Bloomberg) -- The coronavirus outbreak is now severe enough to trigger financial instruments issued by the World Bank to provide emergency funds for poor countries in a pandemic, an independent arbiter decided on Friday.

Boston-based AIR Worldwide Corporation ruled that almost $133 million from two tranches of the bonds will move to the World Bank’s Pandemic Emergency Financing Facility on May 15, saddling investors with losses, according to two bondholders who asked not to be named discussing non-public information.

AIR has compiled its so-called eligible event report, recommending a total wipeout of the entire $95 million of the riskier tranche of the bonds and a $37.5 million writedown for the safer $225 million note, according to the people. The determinations are final and binding on the World Bank and the investors.

Officials at the World Bank didn’t immediately respond to a request for comment on the report. A spokeswoman at AIR declined to comment.

Investors have been receiving coupons of 6.5% over six-month Libor on the safe tranche and 11.1% above Libor on the risky notes ever since the bonds were issued in July 2017.

This decision ends months of speculation on whether bondholders would finally take a hit to free up cash for struggling health systems. The bonds have drawn criticism for their arcane structure and a rigid process that means funds won’t be released until 136 days after the coronavirus outbreak started.

The decision comes a week after AIR’s last report that ruled the Covid-19 outbreak did not yet meet the “exponential growth rate” needed to trigger losses for bondholders. Bond prices on the secondary market barely moved after that report, as investors still regarded a writedown as imminent.

©2020 Bloomberg L.P.