Pandemic Bond Payouts Likely to Be Held Up By Fine Print
Pandemic Bond Payouts Likely to Be Held Up By Fine Print
(Bloomberg) -- Developing countries counting on financial support from the World Bank’s pandemic bond program to shore up their healthcare systems in the face of the coronavirus, have a long wait ahead.
The global coronavirus crisis will almost certainly trigger the riskier of two tranches of catastrophe bonds sold three years ago to raise emergency funds for poor countries with weak health infrastructure. The decision rests with AIR Worldwide Corp., a Boston-based firm tasked as arbitrator when an 84 day period from the start of the outbreak at the end of last year expires on March 23, starting a process that could potentially unlock $132.5 million in funds.
But hospitals in the developing world probably won’t see the money until at least May 15, almost two months later, because of terms written into the securities’ structure, according to two people familiar with the matter.
AIR is due to deliver a report to the World Bank which clarifies any payouts and when they will be imposed on April 9. That’s too close to the monthly coupon date for a payment in April, which means recipients may have to wait another month, the people said, asking not to be named because they’re not authorized to speak publicly.
Representatives for the World Bank did not respond to requests for comment. Officials at AIR Worldwide declined to comment.
A holdup in payouts even after the pandemic is deemed serious enough to qualify, leaves cash-starved hospitals in the developing world potentially facing a wave of infections without adequate infrastructure. Rich countries including the U.S. are already diverting huge financial resources toward bolstering public health systems and China, where the virus first emerged, built a series of emergency hospitals in a matter of days.
The World Bank sold two catastrophe bonds to investors in 2017 in the wake of an Ebola outbreak in Africa. Asset managers bought the notes and received regular interest in exchange for the risk of losing the money if an outbreak is severe enough to hit all of the bond’s triggers.
However, investors holding the riskier tranche of the securities face total wipeout. Dealers have been marking the bonds at depressed levels recently, implying that a writedown is almost inevitable.
Here is a timeline of the next steps until a potential pandemic bond payout:
- March 23: A mandatory 84-day period, starting on the virus’ “Initial Event Date” of Dec. 31, 2019, ends.
- March 23-April 6: The calculating agent, Boston-based AIR Worldwide Corp., will compare the two-week average of cases with the previous two-week average to determine whether the growth rate is positive, one of the preconditions for the payout.
- April 7-8: AIR calculates the results
- April 9: Earliest possible eligible event reporting date. AIR will deliver a report to the World Bank which clarifies any payouts and when they will be imposed. All results are “final and binding” on the World Bank and the bondholders unless someone identifies a manifest error within five days. The report will be available to bondholders or prospective investors on a secure platform provided by Intralinks, Inc.
- May 15: First possible principal reduction date if the report is delivered on April 9. Principal reduction dates fall on interest payment dates, the 15th of each month. But it must be at least five business days following the eligible event report and the April coupon payment falls only three business days after.
Any amounts written down will move to the World Bank’s Pandemic Emergency Financing Facility and can be used by poor countries to tackle the disease. The safer $225 million tranche is set to lose 16.67% of its face value, while the riskier $95 million bond could be wiped out completely.
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